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Extremal Events in a Bank Operational Losses
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Abstract
Operational losses are true dangers for banks since their maximal values to signal default are difficult to predict. This risky situation is unlike default risk whose maximum values are limited by the amount of credit granted. For example, our data from a very large US bank show that this bank could suffer, on average, more than four major losses a year. This bank had seven losses exceeding hundreds of millions of dollars over its 52 documented losses of more than 1millionduringthe1994−2004period.Thetailofthelossdistribution(aParetodistributionwithoutexpectationwhosecharacteristicexponentis0.95???1)showsthatthisbankcanfearextremeoperationallossesrangingfrom1 billion to 11billion,atprobabilitiessituatedrespectivelybetween1350 M and close to $1 billion.Bank operational loss, value at risk, Pareto distribution, insurance premium, extremal event