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When Statistics Fail: Extreme Events in Financial Institutions
Year Of Publication: 2007
Month Of Publication: February
Pages: 5
Download Count: 429
View Count:
Comment Num: 0
Language: EN
Who Can Read: Free
Date: 5-13-2007
Publisher: Administrator
Extreme value theory (EVT) is regularly put forwarded by academics,practitioners and banking regulators as a methodology for measuring the likelihoodof operational risk losses that have a very low probability of occurrence, but whichhave the potential for catastrophic outcomes in terms of financial losses. Given thepotential for extreme events to threaten the financial viability of a banking institution,these groups argue that it makes sense to allocate capital against the likelihood ofextreme events, and EVT forms the basis for such a capital allocation methodology.This paper challenges this proposition, pointing to recent large losses in bankinginstitutions that either maimed or destroyed the institutions in question. In all of thesecases organizational risk culture was at the centre of losses, and more specifically,the incentives inherent in remuneration schemes. It is argued that EVT is inadequatewhen it comes to identifying adverse cultural or incentive issues in bankinginstitutions.
Sundmacher, Maike Sign in to follow this author
Ford, Guy Sign in to follow this author
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