The Impact of COVID-19 on Operational Risk

We are group number six from the Department of Financial Engineering and Actuarial Science have done a final project and presentation that was held on 17 December 2021. The topic that we chose is “The Impact of Covid-19 to Operational Risk” with Chen Professor as our research teacher. This is the first time in our university life to do a big project that is related to our interest and department. We started to plan and make this project in the summer vacation of 2021. From this project we learn about the importance of working together, communicating with each other, and how to manage our time. Not only that, we also learn a lot of things that are related to our department material which is operational risk. As we are all from Indonesia, we also learn much about financial institutions in Taiwan and the risk that generally can happen to a financial institution during a pandemic. We also learn how to calculate the operational risk to a real company. By doing this research we also hope that the things that we learned can be useful for us in the future.

To do this research we analyze operational loss data collected from the TEJ database using the loss distribution approach, one of the Advanced Measurement Approach (AMA) by Basel II, to estimate operational risk. We have limited our data to 2 event periods: pre-Covid (2018-2019) and during Covid (2020-2021) as the coronavirus outbreak in Taiwan started from early 2020. The operational loss data that we collected come from many industries in financial institutions such as life insurance, property and casualty insurance, securities, and financial banking. Operational risks, which are risks that happen when there is a change in value of a company that is caused by internal processes or external events, are hard to avoid. Operational risks can bring a large disadvantage to the corporate. To know whether the operational risk increases or decreases due to the pandemic, we do a calculation and programming to search for the expected loss, value at risk, and also probability of shortfall. We also classify the result by the type of operational risk. We choose to calculate type 4 (clients, products, and business practices) and 7 (execution, delivery, and process management) which is the operational risk that mainly happens in Taiwan. There are also types 1 and six, but due to the lack of data we cannot calculate the result. Our results show that operational risk in Taiwan financial institutions decreased over the years in spite of the pandemic, Covid-19, which proves that Taiwan companies have been reinforcing positive risk management in reducing operational risk events.

When we presented this final project to the two professors, we got some suggestions that maybe can improve our project. As we only research from 2018-2021, they suggest we extend the time length so that we also calculate the operational loss data from before 2018. The other suggestion was whether we can also use another method to count the operational risk to make it more accurate.