## Operational Risk: The Sting is Still in the Tail But the Poison Dependson the Dose

_IMF Working Papers, October 1, 2007_

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## Bibliographic details
- Authors: Andreas Jobst
- Published: October 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868036.001

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### Summary
- Paper investigates generalized parametric measurement methods of aggregate operational risk in compliance with the regulatory capital standards for operational risk in the New Basel Capital Accord ("Basel II").
- Operational risk defined as the risk of loss resulting from inadequate or failed internal processes and information systems, from misconduct by people or from unforeseen external events.
- Analysis informs an integrated assessment of the quantification of operational risk exposure and the consistency of current capital rules on operational risk based on generalized parametric estimation.

### Analytical focus and methods
- Focus on generalized parametric estimation approaches for aggregate operational risk.
- Techniques and concepts referenced in the paper (as listed in source keywords):
  - Advanced Measurement Approaches (AMA)
  - extreme value theory (EVT), generalized extreme value (GEV) distribution, generalized Pareto distribution (GPD)
  - g-and-h distribution
  - peak-over-threshold (POT) method
  - percentile level, threshold quantile, threshold-quantile surface
  - Value-at-Risk (VaR)
  - MLE estimation algorithm
  - estimation method, estimation risk, descriptive statistics, surface estimation
- Application domain: Banking; Capital adequacy requirements; Financial regulation and supervision; Operational risk measurement.

### Key findings and themes (as described)
- The "sting is still in the tail" — emphasis on extreme tail behavior and fat tail behavior in operational risk losses.
- Assessment centers on consistency of current capital rules under Basel II when confronted with generalized parametric extreme-tail estimations.
- Highlights estimation risk and the implications of tail modeling choices for capital estimates and risk management.

### Policy implications and considerations
- Importance of choosing appropriate extreme-tail models (EVT, GPD, GEV, g-and-h) when quantifying operational risk for regulatory capital.
- Relevance of estimation technique selection (including MLE algorithms and POT methods) to the reliability of operational risk capital estimates.
- The paper's analysis is intended to inform the evaluation of Basel II operational risk capital standards and their consistency with parametric tail estimation outcomes.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/operational-risk-the-sting-is-still-in-the-tail-but-the-poison-dependson-the-dose-21378_