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

This study found that the main reason for the use of databases in insurance companies
is the problem of the lack of internal data for the financial analysis of operational risks,
and the inability of quantitative methods, specifically the OpVaR method , to measure
operational risk levels with a high degree of accuracy and control.

Structure of the Study
To answer the problem at hand, this study was divided into three axes as follows:
• The first axis: Introduction to operational risks.
• The second axis: Estimating operational risks using value at risk.
• The third axis: Applying the value-at-risk method in the Algerian foreing bank.

INTRODUCTION TO OPERATIONAL RISK
Concept of Operational Risk
There is not a single consensus on the definition of operational risk yet, as some define
it by identifying what it involves such as risks arising from human error, fraud, process
failure, technological breakdown, and external factors (e.g. lawsuits, fire risk, natural
disasters, customer dissatisfaction, loss of reputation, etc.). (Wong C.Y., 2013).

There is a set of divergent definitions that must be mentioned before reaching general
definitions:

• Value at Risk (VaR) is a statistical technique used to measure the risk
of loss on a portfolio. It estimates the maximum potential loss over a
given time period within a certain confidence level (Pearson, 2019).
• VaR quantifies the worst expected loss over a target horizon at a given confidence
level. It is commonly used in finance for risk management and regulatory purposes.

• VaR represents the maximum loss that will not be exceeded with a specific
probability during a specified time period, often used in the assessment of market
risk (Dowd, 2005).

Kingsley et al., defines it as “the risk of loss resulting from failures in operational
processes or the systems that support them, including those that adversely affect
reputation, and the legal execution of contracts and claims.” This definition includes
both strategic and business risks, that is, operational risks arise from the disruption of
people, processes and systems within the organization. Strategic and commercial risks
arise outside the company and stem from external causes such as political unrest,
changes in organizational or government policy, changes in the tax system, mergers
and acquisitions, changes in market conditions, etc. (Linda, Jacob, & Anthony, 2004).
As for the Basel II Committee, it defined it as "the risk of EBAring losses resulting
from the inefficiency or failure of internal processes, the human element, systems and
external events" (Supervision, 2004, p. 664).

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