Operational Risk Quantification in Financial Institutions: A Bayesian Network Approach for Loss Distribution Modeling

Posted: Oct 28, 2025

• Chen Wei
• Maria Rodriguez
• Kenji Tanaka
• Fatima Al-Mansoori

Abstract

This research develops a comprehensive framework for operational risk quantification in financial institutions using Bayesian networks. Traditional operational risk models often fail to capture the complex interdependencies between risk factors and loss events. Our methodology integrates historical loss data with expert judgment to construct a Bayesian network that models causal relationships between key risk indicators, control effectiveness, and loss severity. We analyze 5,743 operational loss events from 42 international banks spanning 2000-2003. The results demonstrate that our Bayesian network approach provides superior predictive accuracy compared to conventional loss distribution approaches, with a 23.7