A nonlinear analysis of operational risk events in Australian banks

Yifei Li; Neil Allan; John Evans

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Cladistics analysis provides new insights into operational risk events in banks by identifying the combinations of underlying characteristics that were involved in each risk event.
The analysis for Australian banks indicates that poor control has been by far the main characteristic of operational risk event losses.
The analysis has identified the main characteristics involved with operational risk losses and these are shown to be consistent over time, thus enabling management to concentrate on these characteristics to reduce future losses.

Abstract

We propose a methodology applied to complex systems to analyze operational risk events in banks, with the objective of determining an understanding of the key characteristics and their relationships in initiating operational risk losses. We applied our methodology to operational risk losses in Australian banks over the period 2010-14. The analysis identified that there are a small number of characteristics that are common to many operational risk events, and these "level 1" characteristics are stable across time, which implies operational risk losses could be controlled by managing these characteristics. The methodology adds value to the existing analysis by identifying the main characteristics of operational risk events in a rigorous manner.

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