Journal of Operational Risk

Toward an efficient people-risk capital allocation for financial firms: evidence from US banks

José Manuel Feria-Dominguez and Enrique Jiménez-Rodríguez

  • We identify four operational risk event-types exposed to People factor.
  • An efficient People-risk capital allocation is suggested.
  • Diversified People-VaR is estimated by using Multivariate Fast Fourier Transform.
  • A new measure for People-risk adjusted performance in banking is provided.
  • Given a RAROC hurdle rate, people threshold for value creation is identified.

Although people are a very important asset for financial firms, they are a key source of risk. Banks must allocate regulatory capital for covering their people-risk expo- sure. By using the Algo OpDataTM  data set from US banks, and based on the loss distribution approach, we first estimate people-value-at-risk (people-VaR), assuming perfect correlation among people-risk categories but nonperfect dependence, for which the multivariate fast Fourier transformation is proposed. The diversified people-VaR is provided as a key indicator of an efficient capital allocation, and the traditional risk-adjusted return on capital measure is then readapted to evaluate the people-risk-adjusted performance.

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