Page 4 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.81, # 2, 2024, pp. 4-29

OPERATIONAL RISK ESTIMATION USING THE VALUE-AT-
RISK (VAR) METHOD: CASE STUDY OF THE EXTERNAL
BANK OF ALGERIA (EBA)

Aimene Farid , Bahi Nawel 2
1*
1 Faculty of Economic Sciences, Commerce, and Management Sciences, University
of Souk Ahras, Algeria. * [email protected] (Corresponding author)
2 Faculty of Economic Sciences, Commerce, and Management Sciences, University
of Tebessa, Algeria. [email protected]

https://doi.org/10.30546/jestp.2024.81.02.01

Received: January 30; accepted September 20, 2024; published online December 25, 2024

ABSTRACT
This study aims to shed light on the application of the value-at-risk (VaR) method to
estimate operational risks at the level of the External Bank of Algeria (EBA), by
taking a comprehensive view of operational risks and studying how to assess them
using value at risk, and then trying to apply the latter at the level of the External Bank
of Algeria to two events using two different approaches (Monte Carlo and the
scheduling process). This was based on the case study approach with the use of the
interview as a tool for data collection, and the use of Excel to analyze it. Through this
study, it became clear that it is possible to determine the maximum loss that the
Algerian External Bank could be exposed to - due to operational risks - for the coming
year at different levels of confidence, as well as to determine the capital requirements
necessary to cover it, taking into account several requirements to ensure its proper
application, foremost of which is the provision of a comprehensive and accurate
database, sophisticated and specialized programs and qualified human cadres, all this
to create greater flexibility in dealing with volatile risks in the modern business
environment.

Keywords: operational risk, value at risk, risk assessment, capital requirements.

JEL Classification: G32, C69, G59

INTRODUCTION
Financial institutions have long clarified the obvious fact that “reputation is everything”,
especially in businesses dealing with intangibles that require public and customer trust
(Riel, 2004, p. 52), such as banking, the loss of reputation can lead to catastrophic
consequences such as the devastating loss of Arthur Andersen's reputation in the wake of
the Enron scandal, despite this recognition, operational risk modeling is still in its infancy
as financial institutions have been rather slow to absorb operational risk measurement and
management tools to protect their capital (Power, 2007).

4