Operational risk as a function of the state of the economy ¬リニ

a r t i c l e i n f o This paper examines the frequency and severity of the operational losses incurred by U.S. firms during the period 1990–2007, as reported by Fitch Risk. The losses are examined in relation to the state of the U.S. economy as represented by the unemployment rate, which is the macroeconomic variable that is most intuitively appealing in terms of association with the incidence of operational losses. The results of structural time series modelling reveal that while total severity and average severity are positively related to the unemployment rate, the frequency of losses is not. Operational risk is the risk of losses arising from the failure of people, processes and systems, and from external events. A view has been put forward repeatedly that, unlike market risk and credit risk, operational risk is idiosyncratic in the sense that when it hits one firm, it does not spread to other firms. This view implies the absence of contagion and that operational risk is firm-specific, not systemic. Lewis and Lantsman (2005) describe operational risk as being idiosyncratic because " the risk of loss tends to be uncorre-lated with general market forces ". This, the argument goes, is not a characteristic of market risk and credit risk: a market downturn affects all firms, and default by the customers of one firm has adverse implications for its ability to meet its obligations to other firms. Danielsson et al. (2001) criticise the Basel II Accord by arguing against the need to regulate operational risk on the grounds that it is idiosyncratic. 1 One reason why operational risk is thought to be idiosyncratic is that it is not related to the state of the economy, in the sense that the frequency and severity of losses do not depend on whether the economy is in a boom or recession. 2 This is the essence of the argument put forward by Lewis and Lantsman (2005) who suggest that operational risk is " uncorrelated with general market forces ". The objective of this paper is to find out if the frequency and severity of operational losses are related to the state of the economy, using the unemployment rate as a proxy for the macroeconomic environment and a reference cyclical variable. The use of unemployment rate in preference to other cyclical variables is motivated by some of the propositions put forward to explain why …