ABSTRACT
This chapter provides an overview of the quantification of operational risk. Developing operational risk measurement from measuring single risks, to measuring a group of different risks, necessitates consideration of the degree of correlation between the different risks. For example, the occurrence of one risk may increase the likelihood of the other risk occurring. Measurement methods based on the probability distribution, is a ‘loss distribution approaches’ and are widely used as the basis of operational risk measurement. Risk based performance measurement is an important management tool to ensure that both performance and related risk are both being adequately managed. It allows the organisation to focus on activities which provide the best performance for the risk being taken. Although many organisations will not formally quantify levels of operational risk, some industries such as banking, require quantification to take place as part of ensuring an organisation has sufficient capital to support its risks.
