Page 13 - 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)

APPLYING THE VALUE-AT-RISK METHOD IN THE ALGERIAN EXTERNAL
BANK:

Applying value-at-risk techniques to measure operational risk is more complex than
applying them to market and credit risk, since the calculation of this indicator depends
more on the autonomy of its users, and therefore the opinion of an expert who benefits
from several years of experience is very important because he is familiar with
predicting the occurrence of operational risk.

Identifying The Network Of Risk Factors
As mentioned earlier, for the calculation of OpVaR, operational risks are formed
within a network called the risk factor network, where the network represents different
groups of business lineand type of event, and based on this network, both the
frequency and severity of risk are determined for each risk factor.

We have a set of data on the operational events to which the Algerian External Bank
is exposed, which represents the study sample as follows: To estimate the OpVaR of
the bank, a sample of these events was selected.

• The Algerian External Bank is constantly exposed to the breakdown of computers
allocated for payments and settlements, due to the age of the used devices and their
depreciation, which affects the work process, as their frequency is on average 3 times
per year. As for the value of the loss, it varies according to whether the failure is
simple or complex. The loss may range from 2000 DZD to 4000 DZD if the failure is
technical and requires simple maintenance operations, and it may range from 10,000
DZD to 17,000 DZD if the failure requires changing one of the components of the
device, and sometimes it may amount to changing the device completely, so the loss
then ranges from 35,000 DZD to 50,000 DZD.

• The Algerian External bank was exposed to numerous misappropriations of funds
by employees within the bank who transferred them abroad, amounting in total to
about 1.8245 DZD billion over nine years.

In order to determine the network of risk factors, it is necessary to distribute the
previous data on the line of business and the type of event, and the following table
shows this according to the classification of the Basel Committee:

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