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An analysis of the feasibility of an extreme operational risk pool for banks

Published online by Cambridge University Press:  06 August 2018

Yifei Li ,
Neil Allan  and
John Evans
Yifei Li
Affiliation:
Sydney Business School, University of Wollongong, Macquarie Place, Sydney 2000, Australia
Neil Allan
Affiliation:
Systems Centre, University of Bristol, Queen’s Building, University Walk, Clifton, BR8 1TR, UK
John Evans*
Affiliation:
Centre for Analysis of Complex Financial Systems, Summer Hill, NSW 2130, Australia
*
*Correspondence to: John Evans, Centre for Analysis of Complex Financial Systems, PO Box 363, Summer Hill, NSW 2130, Australia. Tel: +61414643658. E-mail: jevans@pgeaus.onmicrosoft.com
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Abstract

Operational risk events in banks include extreme events with significant losses being incurred and with substantial impact on share prices. A pooling arrangement between banks that would be able to reduce overall costs and reduce share price impacts would seem desirable, but one of the major inhibiting factors to establish the feasibility of such a pooling arrangement is that statistical models of these extreme events are difficult to build with any reliability. This paper uses both quantitative and qualitative analysis of operational risk losses for EU and US banks over the period 2008–2014 to establish the feasibility of creating a pooling arrangement between the banks and concludes that such an arrangement might be feasible but would require compulsory membership of the pool and capping of losses.

Keywords

Extreme operational risk lossesPooling of lossesInsurance of extreme events

JEL classification

G22: Insurance • Insurance Companies • Actuarial Studies G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages
Type
Paper
Information
Annals of Actuarial Science , Volume 13 , Issue 2 , September 2019 , pp. 295 - 307
Copyright
© Institute and Faculty of Actuaries 2018 

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