Operational Risk Measurement: A Literature Review

Abstract

Operational measurement is not the only target of the overall operational risk management process, but it is a fundamental phase as it defines its efficiency; furthermore the need to measure operational risk comes from the capital regulatory framework. Taking this into account, the chapter describes and compares the different methods used to measure operational risk, both by practitioners and by academics: Loss Distribution Approach (LDA), scenario analysis and Bayesian methods. The majority of the advanced banks calculate capital requirement through LDA: the chapter focuses on how it works, analysing in detail the different phases of which it is composed and its applications, in particular the Extreme Value Theory (EVT), which is the most popular one.