Operational risk of banks and firm size
Stochastic process based modelling, scaling behaviour and the effect of firm size on operational risk management methods
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Present study deals with operational risks of banks (i.e. as Basel II defines the risk of loss resulting from inadequate or failed operation of people, systems, and processes or from external events ). The complexity of financial institutions and the regulatory efforts make the analysis of the operational risk necessary. The main message of this book is that institution size has an important effect on operational risk exposure and management. Firstly, a well-behaving stylised stochastic process based approach underpins the applicability of Poisson frequency and fat-tailed loss distributions, h...
Present study deals with operational risks of banks (i.e. as Basel II defines the risk of loss resulting from inadequate or failed operation of people, systems, and processes or from external events ). The complexity of financial institutions and the regulatory efforts make the analysis of the operational risk necessary. The main message of this book is that institution size has an important effect on operational risk exposure and management. Firstly, a well-behaving stylised stochastic process based approach underpins the applicability of Poisson frequency and fat-tailed loss distributions, however a method built from historical data on a small sample may result in estimation bias. Secondly similarly to the results for other countries the total operational risk losses in a given period are significantly correlated with gross income-based size of banks in Hungary as well, mainly driven by frequency. Finally, it is found that larger institutions are more inclined to use advanced operational risk management methods. This might be a favourable tendency from systemic risk point of view, as institutions with potentially higher system risk tend to apply more conscious risk management.
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