MODELING OPERATIONAL RISK IN FINANCIAL INSTITUTIONS: APPLICATION AND IMPROVEMENT ON EVT

Many commercial banks take operational risk and market risk into account when calculating capital adequacy ratio. This paper mainly elaborates on the application of EVT in the measurement of operational risks in financial institutions. There are roughly two ways to proceed with the EVT analysis on extreme operational loss events, the first of which is based on the point process, which is called POT, where it chooses a threshold and ignore when the events happened. According to the domestic financial institutions, the author suggests that at the early stage they should (1) build reliable OR data base, (2) design sound operational risk indicators, and (3) calculate and provide sufficient economic capital to defense the OR.