Operational risk measurement: integrating the amplification effects of reputational risk

Yinghui Wang, Xuting Mao, Jianping Li, Xiaoqian Zhu and Yizhe Dong

Abstract

Operational risk events lead not only to direct economic losses but also to negative stakeholder evaluations, escalating into reputational risk. Due primarily to quantification challenges, existing research often underestimates operational risk capital by overlooking the amplification effect of reputational risk. This paper proposes an approach to measuring operational risk losses that integrates the interplay between reputational and operational risks. Based on 3723 data observations from the Chinese Operational Loss Database, this paper quantifies the reputational losses triggered by operational risk events, demonstrating their amplification effects on direct losses. For example, the operational risk capital is estimated at ¥322.278 billion based on the traditional loss distribution approach, while this figure jumps ¥1687.706 billion when the amplification effects of reputational risk are incorporated. This study explores the complex interplay between operational risk and reputational risk, providing a new perspective for the more rational allocation of operational risk capital.