Page 5 - Azerbaijan State University of Economics

Aimene Farid, Bahi Nawel:Operational Risk Estimation Using the Value-at-Risk (VAR)
Method: Case Study of the External Bank of Algeria (EBA)

Value-at-risk (VaR) is one of the most advanced methods for measuring operational
risk, by estimating the maximum potential losses that risk exposure can generate at a
certain area of confidence, and accordingly, the capital requirements necessary to
cover those risks are determined (Jorion, 2007).

OpVaR, according to its varying approaches, has succeeded in finding its place within
any risk management system, but it is considered somewhat limited and superficial
because of the qualitative nature of this risk, as it depends more on the autonomy of
its users, and despite its limitations, OpVaR is always the first step towards defining
a quantitative model for operational risk (Power, 2006).

Problematic: The application of the VaR method to measure operational risks is a
contract and difficult to apply on the ground because it requires the availability of a
long series of intensive and complex data, and therefore the problem of the study can
be crystallized in the following question:

Can the value at risk(VaR) method be applied to estimate the maximum operational
risk at the level of the Algerian External bank (EBA) ?
This problem includes a set of sub-questions:
• How can operational risk be estimated using the value-at-risk method ?
• How can the minimum regulatory capital needed to cover operational risk be
determined using the value-at-risk method ?

Study Hypotheses
In light of the problematic issue, the main hypothesis of this study can be formulated
as follows:
The proper application of the value-at-risk method to estimate the operational risks in
the Algerian External bank requires the existence of some basic requirements that are
not available in the bank under study.
Under this hypothesis, several partial hypotheses are included as follows:
• The nature of operational risk statements makes it more difficult to estimate the value
at risk to them.
• The application of the value-at-risk method is useful in providing accurate estimates
of the capital requirements required to cover the risk.

Study Objective
The main objective of this study is to clarify how to measure operational risk using
the value-at-risk method with two different approaches (Monte Carlo and the
scheduling process), and how this can be used to calculate the minimum
organizational capital necessary to cover operational risk.

5