Journal of Operational Risk

Marcelo Cruz

Lehman Brothers

Welcome to the fourth issue of The Journal of Operational Risk. With this issue we complete the first volume and year of the Journal’s existence and I would like to take this opportunity to thank the editorial board for their invaluable help and guidance, Risk Journals for all their extraordinary editorial and publishing work and the operational risk industry for the strong support during this year.

During this first year we faced the expected difficulties that all new Journals in a new area face. Nevertheless, we have not just overcome these hurdles but we have published some of the most referenced articles in other publications in the industry. The Journal receives a number of excellent quality articles and just one year from its inception the Journal now has a healthy “competition” for a slot in its issues. I have also received many supportive messages and suggestions from people in the industry. I can only thank you for the support and ask you for your continued collaboration.

For those of you who have just got hold of this Journal for the first time, the main objective of The Journal of Operational Risk is to publish high-quality research on the risk measurement and management of operational risk and to promote greater understanding of this new and fast growing area of risk. This Journal also aims at being a new forum for discussions on this subject, facilitating the publication of top-quality operational risk technical papers. Research in operational risk is a field that is growing at a fast pace in both the financial industry and academia. There are currently many lines of research, most of them trying to overcome the challenges presented by the new regulatory standards created by the Basel II Accord. However, currently there is not a single forum for the debate of these ideas. The Journal of Operational Risk has been published to fulfill this much needed role. Please see the website www.journalofoperationalrisk.com for more details.

At this moment I would like to say that I am impressed by the increasing number of high-quality submissions that The Journal of Operational Risk has been receiving. We thank the authors for their trust in this young publication and appreciate all the encouraging messages sent by a number of colleagues in the industry and academia. All of this gives us comfort that we are taking the right steps to build this new global industry forum for operational risk.

Research Papers

In this fourth issue, there are three research papers in the main section. One of them shows the analytical approach used by Deutsche Bank that bravely dared to disclose their methods to the industry. Another paper deals with the measurement of operational risk using internal loss information and one other paper deals with the issue of thresholds in data collection.

In the first paper, Quantification of operational losses using firm-specific information and external database, Ran Wei applies Bayesian credibility to combine external and internal data, which, given papers published in previous issues, seems to be the dominant thought on the aggregation of the different operational risk data. The author starts the method by separately estimating frequency and severity distributions of external data and then applying credibility theory to aggregate them with internal data.

In the second paper, Effect of a data collection threshold in the loss distribution approach,Mignola and Ugoccioni, in their second article published in this journal, show how the choice of data collection thresholds can impact the economic capital.

In the third paper, LDA at work: Deutsche Bank’s approach to quantifying operational risk, Aue and Kalkbrener show how Deutsche Bank tackles the measurement of operational risk. Given the nature of this paper, ie, for the first time a financial institution openly submit their methodology to the industry, I would like to encourage readers to debate by submitting discussion papers that will be featured in the forum section of the journal which highlights topics in shorter form. I believe this is an excellent opportunity from which to stimulate debate and look forward to hearing from you.

Operational Risk Forum

This section is intended to provide a less formal forum on findings and ideas about operational risk without the academic rigor demanded in the main section. The mission of the Forum is to promote active discussions of current issues in operational risk. Articles submitted to this section should preferably not exceed 8,000 words.

In this issue, Imad Moosa gives his views on some misconceptions about operational risk.