A Quantitative Operational Risk Management Model

Abstract: A possible modified use of the New Basel Accord’s LDA capital adequacy calculation method is proposed, including expert’s estimates in addition to available historical data and using calculation methods from the Extreme Value Theory (EVT). In financial institutions with short histories the operational risk losses follow a fat-tailed distribution from the EVT, which is why an EVT-based model is most suitable for their analysis. In cases of small historical data samples the addition of experts ’ estimates and the use of simulated data provides for both a simple and a reliable model to be used for operational risk management by identifying key business areas and key risk factors in both smaller financial institution as well as larger financial institutions, sub-divided into smaller comprehensive sections