Prague Economic Papers 2011, 20(1):23-39 | DOI: 10.18267/j.pep.385

Operational Risk - Scenario Analysis

Milan Rippel, Petr Teplý
Institute of Economic Studies, Faculty of Social Sciences, Charles University In Prague, Opletalova 26, CZ - 110 00, Praha 1 (milanrippel@seznam.cz; teply@fsv.cuni.cz).

This paper focuses on operational risk measurement techniques and on economic capital estimation methods. A data sample of operational losses provided by an anonymous Central European bank is analyzed using several approaches. Multiple statistical concepts such as the Loss Distribution Approach and the Extreme Value Theory, including scenario analysis method, are considered. Custom plausible loss events defined in a particular scenario are merged with the original data sample and their impact on capital estimates and on the financial institution as a whole is evaluated. Two main questions are assessed - what is the most appropriate statistical method to measure and model operational loss data distribution and what is the impact of hypothetical plausible events on the financial institution. The g&h distribution was evaluated to be the most suitable one for operational risk modeling. The method based on the combination of historical loss events modeling and scenario analysis provides reasonable capital estimates and allows for the measurement of the impact of very extreme events on banking operations.

Keywords: stress testing, operational risk, scenario analysis, economic capital, loss distribution approach, extreme value theory
JEL classification: C15, G21, G32

Published: January 1, 2011  Show citation

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Rippel, M., & Teplý, P. (2011). Operational Risk - Scenario Analysis. Prague Economic Papers, 20(1), 23-39. doi: 10.18267/j.pep.385
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