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What Has Worked In Operational Risk?

Author

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  • Giuseppe Galloppo
  • Alessandro Rogora

Abstract

Financial institutions have always been exposed to operational risk – the risk of loss, resulting from inadequate or failed internal processes and information systems, from misconduct by people or from unforeseen external events. Both banking supervision authorities and banking institutions have recently showed their interest in operational risk measurement and management techniques. This newfound prominence is reflected in the Basel II capital accord, including a formal capital charge against operational risk, based on a spectrum of three increasingly sophisticated measurement approaches. The objective of this paper is to increase the level of understanding of operational risk within the financial system, by presenting a review of the literature on the modelling techniques proposed for approach such risk in financial institutions. We perform a comprehensive evaluation of commonly used methods, with a view to compare the performance of different estimators and quantitative estimation methods, for implementation of operational risk measurement. We find that there is currently high variability in the quality and quantity of disclosure on operational risk so, as our conclusion, we try to offer instructive and tractable recommendations for a more effective operational risk measurement.

Suggested Citation

  • Giuseppe Galloppo & Alessandro Rogora, 2011. "What Has Worked In Operational Risk?," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 5(3), pages 1-17.
    • Handle: RePEc:ibf:gjbres:v:5:y:2011:i:3:p:1-17
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    File URL: http://www.theibfr2.com/RePEc/ibf/gjbres/gjbr-v5n3-2011/GJBR-V5N3-2011-1.pdf
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    References listed on IDEAS

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    1. Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
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    Cited by:

    1. M. Bee & J. Hambuckers & L. Trapin, 2019. "Estimating Value-at-Risk for the g-and-h distribution: an indirect inference approach," Quantitative Finance, Taylor & Francis Journals, vol. 19(8), pages 1255-1266, August.
    2. Suren Pakhchanyan, 2016. "Operational Risk Management in Financial Institutions: A Literature Review," IJFS, MDPI, vol. 4(4), pages 1-21, October.
    3. Roxana HERGHILIGIU, 2013. "Operational Risk Disclosure In Romanian Commercial Banks," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 4(4), pages 171-178, December.

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    More about this item

    Keywords

    operational risk management; Basel II;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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