Operational Risk – Scenario Analysis

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 defi ned in a particular scenario are merged with the original data sample and their impact on capital estimates and on the fi nancial 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 fi nancial 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.