An Approach to Modelling Operational Risk in Banks
نویسندگان
چکیده
The opinions and ideas expressed in this paper are those of the author(s) alone. Henley Management College does not necessarily concur with any of the opinions expressed herein. The author(s) invites both comments and discussion from anyone who may read a paper in this series. If you have any suggestions which may be helpful to the author(s), then please write to them at the address shown above. While much work has been done in recent years on developing models to measure Market and Credit risks in banks and securities firms, there have been fewer attempts to model other important risks, in particular Operational Risk. This may be because, although recognised as important, there is little agreement on what constitutes Operational Risk. There is some agreement, however, that Operational Risk arises from a "breakdown" in operational processes and that Internal Audit has a key role in identifying potential operational breakdowns. This paper draws on the well-established theories of Reliability developed in Operational Research to propose models for estimating the likelihood of failures/breakdowns occurring in operational processes and for estimating the losses that might result from such breakdowns. Using these models, the paper demonstrates how a Value at Risk may be computed for the set of processes that comprise the operations of a bank. The role of Internal Audit in calibrating and testing such models is also highlighted.
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