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RISK MANAGEMENT PROCESS The earnings volatility method This method considers the statistical variability in the earnings of the company, or of its divisions, and either empirically calculates the unexpected loss at a certain confidence level or more likely fits a standard statistical distribution to the available data and analytically calculates the unexpected loss at a certain confidence level. Before the analysis is undertaken the earnings data needs to be adjusted for risks other than operational risk (with this depending on the definition chosen). Even at the broad definition, this would involve adjusting for the full effect of credit and market risks. The same method can be applied to volatility of asset values, including to the market capitalisation of the company, but this is not readily possible for its divisions. The essential problems with this method are: 1. The difficulty in finding sufficient consistent data to perform either the empirical analysis or to fit a standard...

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