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Operational Risk Measurement of Financial Institutions via AHP  

Choi, Seung-Il (공주대학교 산업시스템공학과)
Publication Information
Korean Management Science Review / v.28, no.3, 2011 , pp. 73-82 More about this Journal
Abstract
Basel II advanced measurement approaches for operational risk need to estimate the frequency and severity distribution of operational losses. Due to lack of internal loss data, the estimation is impossible in many cases and so external loss data might be used by scaling on asset or gross income. To get around lack of loss data, scenario analysis combined with loss distribution approach can be useful in calculating the capital charge of operational risk. However, scenario based loss distribution approach requires much time and effort. Instead we may apply the analytic hierarchy process to measure operational risk of financial institutions. The analytic hierarchy process combined with loss distribution approach is to estimate the capital charge of operational risk in other areas based on the operational VaR in an area with sufficient loss data. AHP provides a tool for timely measurement of operational risk in this rapidly changing global environment.
Keywords
Operational Risk; AMA; Loss Distribution Approach; Analytic Hierarchy Process;
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