A proposal of operational risk appetite framework measure

This dissertation proposes a Risk Appetite Framework (RAF) measure of the Operational (Op) Risk in financial institutions. We develop a procedure that gives, through time, the Position (measure of the bank Profile) in comparison to fixed limits, that correspond to the Target (bank Appetite) and the Trigger (bank Tolerance). We implement a measure that, rather than being a pure risk measure, only related to the losses, is a performance one, being obtained starting from a ratio of the OpLosses over the Revenues. Due to the regulatory requests and to the specific purposes of the RAF we develop an innovative model to forecast the OpLosses, a model that is chosen to be far from the common theoretical framework of the OpRisk introduced by Basel II for Capital Adequacy purposes. The Single Line (SL) model we introduce represents the cumulated OpLosses of a single division. It is a dynamic model that uses the Lévy processes with finite activity. Moreover, while in the Lévy theory time-homogeneous processes are usually involved, we use the time-inhomogeneous ones allowing the frequency of the jump component to be time-dependent. So we are able to represent the periodicity of the manifestations that characterize the OpRisk. Furthermore, to obtain the results at the entire bank level, considering the dependencies among the divisions, we create the Group model, that uses a t-student copula applied to the Jump results of the Montecarlo simulations obtained by the SL model. After choosing which quantiles of the Montecarlo simulated distributions use to represent the Losses, we adjust the OpLosses used in the Position values in two ways. The first, that we call the Business Adjustment, is a correction of the forecasted losses based on the current growth rate of the Revenues. The second idea is to insert a forward looking perspective, weighting the effect on the strategic choices of the management. We call this correction to the forecasted and actual OpLosses the Indicator Adjustment because it is based on Risk Indicators, that we choose among the Compliance and Organizational ones, that cover risks we consider the main drivers of the future OpLosses.