Dear Reviewer,

We thank you in advance for your comments and suggestions for our paper. We have
made adjustments and improvements to the paper based on your suggestions and
directions. Here we attach the response we did based on your suggestion.
Hopefully our paper can meet the criteria of this review process.
Thank you,
Regards.

Suggestions and Responses:

The aim of the manuscript is to assess the maximum potential losses for digital banking
operations, by proposing a method for this. The topic choice, i.e. the operational risk of
digital financial transactions is of high relevance for the banking sector, however, the
manuscript has methodological issues to be concerned for improvement.
- Response:
Dear Reviewer,
Thank you for the positive comments and suggestions for this research.

General concept comments

Point 1: Financial service providers are not solely banks, but other financial (monetary and non-
monetary) institutions and non-bank FinTech organizations as well. The manuscript fails to
include the later ones, or explain why only refers to banks.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We have added an explanation regarding digital financial service providers. That the service
provider is not just a bank. (Page 1 Lines 32-35).
"Financial service providers are not only banks, but also other financial institutions such as
non-bank FinTech. Banking companies need to ensure that they keep up and take
significant steps to compete effectively with financial institutions at the forefront of
technology like FinTech and WealthTech companies."

In addition, we also added the reasons why we chose to focus on banks. We write down the
argument in Page 1 Line 38-42.
"In this case, the focus is bank companies. Because the reach of customers from banking
companies is greater than non-banks. In addition, financial transaction services offered by
banks can be more comprehensive than non-banks. Therefore, banking companies must be
able to develop the digital technology to increase the advantages of financial transaction
activities."
Point 2: The list of the risk of digital financial transaction activities in lines between 52 and 57
overlap, and/or needs to be explained further.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
List of the risk of digital financial section has been summarized to reduce the overlap (Page
2 Line 66, deleted point: f and g).

Point 3: The authors mention to the prudent principles in general, without referring to the
regulatory background and the eligible extent of these principles.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We have added an explanation regarding the precautionary principle in accordance with
applicable regulations. This explanation is written in Page 2 Line 69-75.
“Based on the regulations of the Indonesian financial services authority (7 /POJK.03/2016)
and the provisions of Law 2/No.10/1998, it is stated that Indonesian banks in conducting
their business are based on economic democracy by using the principle of prudence.
Because digital financial activities pose an increased risk, thus requiring banks to apply
prudential principles and risk management. One form of regulatory implementation is the
Real Time Gross Settlement (RTGS) system as a consequence to minimize the risks of
digital financial transactions”

Point 4: In relation to Table 1 about the research gap of the study, the authors propose to use the
Extreme Value Theory to determine the maximum potential 117 loss for the operational risk
of digital financial transactions. However, there is no proof (out of the literature they cited)
that EVT or extreme statistical modelling is the applicable measure for these specifics of
risks.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We have added reasons for choosing the EVT method for digital banking operational risk.
This reason is written in Page 4 Line 152-152.
“This is due to the extreme modeling approach suited to operational risk characteristics of
E-Banking as an extreme event”

In addition, we also add an explanation of the importance of EVT for operational risk based
on its characteristics. We write down the argument in Page 4 Line 134-136.
 “Meanwhile, operational risks are generally large in number but rarely by occurrence, or
as the opposite. So, it is worth to implement the EVT because of these operational risk
characteristics”

Point 5: Regarding the materials, lines 168-169 indicate that the authors used fictious data. Is it
so? To which calendar year do the analysis refer?
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We have added time period information to the data used. The sentence is added in Page 4
Line 211-214.
“As for the initial sample data, it represents the risk of digital banking losses due to
downtime and timeouts. The sample data period is May 1, 2020 to August 31, 2020. Then
the sample data becomes material for digital banking risk simulation.”
So that the sample data that we mean is the real data. But because these data are insufficient
to meet the EVT criteria in the GPD distribution. Then this sample data is simulated.

Point 6: What was the reason for 10-time resampling (line 285)? (Is it advised by some
literature to apply 10times?)

- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We've added reasons regarding the selection of 10 times resampling. This reason is written
in Page 8 Line 334-336.
"The process of 10 times resampling was taken because the results of the data form already
show heavy-tail or far from approaching the normal line (seen in Figure 1). This indicates
that the data are fit with the EVT characteristics."

Point 7: The result that "the weight of downtime 348 risk is greater than the risk of the timeout"
(line 348) seems to be a random result. In the discussion part, the authors indicate that "this is
in line with the technical analysis of digital banking" (line 382), without further exploring it.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We added further exploration regarding “discussion”. We go deeper into the analysis of the
potential losses of E-Banking. It can be seen in the addition of sentences that explain the
results of downtime being greater than the timeout associated with the data. (Page 12 Lines
436-440).
 “This is in line with the technical analysis of digital banking. “Downtime risk” in the
digital banking system is a common risk that causes operational losses. Based on the initial
sample data on digital banking risk losses, the value of Downtime losses is greater than the
timeout. In addition, in the digital banking system, downtime is bound to occur due to the
need for service maintenance. This is the cause of downtime has a higher risk value than
timeout. When there is downtime, all transactions cannot run and cause a system failure.”

Point 8: Concerning the maximum potential loss from digital banking risk, it is worth to
mention that operational risks in general are large by amount, but rare by occurrence or, as
opposite, small by amount but large by occurrence. This might change the interpretation of
the resulted high estimate for the maximum potential loss.
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We added an explanation of operational risk characteristics. Then we explain the
importance of EVT because of that. (Page 4 Line 134-136)
“Meanwhile, operational risks are generally large in number but rarely by occurrence, or
as the opposite. So, it is worth to implement the EVT because of these operational risk
characteristics”

Point 9: Specific comments

 Lines 39-40: In which way does digital IT have positive (and possibly negative)
effects on the financial activities of banks?
- Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 1 Line 43-47)
“The development of new digital information technology in banking has a positive
effect on financial activities in banks [6]. The main positive impact is to make
transactions easier for customers. Customers do not need to make financial
transactions at the bank but only use their gadgets. This is also a good impact in
post-covid-19 life, because digital banking has reduced direct interaction.”

 Lines 40-44: the range of electronic banking services is broader, as in the current
competitive environment the banks are coming up with new innovative solutions for
most bank-related financial services.
- Response:
Dear Reviewer,
 Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
We added some electronic banking services on point g, h, i, j. (Page 2 Line 47-53)
“The digital or electronic banking services include: (a) account statements for
customers; (b) information on banking products (deposits, loans, securities); (c)
applications for opening deposits and obtaining loans and bank cards; (d) internal
transfers to bank accounts; (e) transfer to an account at another bank; and (f)
currency conversion; (g) make bill payments; (h) online shopping payment
instruments; (i) top up e-money or e-wallet; (j) a means of payment in conventional
stores using a QR Code”

 Lines 46-48: this is a mis-statement; please consider the role of FinTech, WealthTech,
etc.
Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 2 Line 55-59)
“With various digital services for customers to facilitate financial transactions,
banking companies compete with FinTech or WealthTech. Banking companies must
be able to provide a wider range of digital services, so that customers are more
interested in using banking services and the value of banking transactions will
increase”

 Lines 62-65: it is not understandable, please rephrase it.

Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 2 Line 76-80)
“RTGS is implemented if there is a system failure during a transaction, then bank
companies are required to send new transactions in real time. The new transaction
must be executed immediately without waiting for a refund. The funds used in the
new transaction are the bank's own company funds. This makes it important to
allocate reserve funds for operational risks”

 The term 'Extreme Value Theory' occurs in line 69 , but then only explained in lines
92-97.
Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
 We added some general explanation about EVT in Line 82-86. Then we explain
more in Line 109-112.
“The approach method used to calculate the maximum potential losses is Value-at-
Risk (VaR) with Extreme Value Theory (EVT) for extreme risks. In economics and
finance, the risk of loss can be measured using VaR. If the economic phenomenon
shows an extreme event, an EVT approach is needed to represent it.”
“EVT considers giving the basis for extreme statistical modeling. Many science and
modern engineering fields must deal with rare events that have significant
consequences and are usually called extreme events. That study was intended to
explain the basics of EVT and the tactical aspects of predicting and evaluate the
statistical models for measuring risk from extreme incidents”

 Please rephrase it: "The results of the study 86 show that possibly diversification is
incompatible" (lines 86-87).
Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 3 Line 101-104)
“In addition, the results show that the use of standard VaR is not appropriate for
risk asset diversification involving a mean-infinite distribution (representing
extreme events). So the EVT approach is needed to determine VaR in extreme
events.”

 What do you mean by "strong calculation techniques"? (line 100)

Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
Sorry in advance for the misspelling. We mean “robust calculation technique”. Then
we added some explanation of that (Page 3 Laine 101-104)
“In addition, the results show that the use of standard VaR is not appropriate for
risk asset diversification involving a mean-infinite distribution (representing
extreme events). So the EVT approach is needed to determine VaR in extreme
events.”

 In line 281, which was the software you mentioned?

Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 8 Line 329-331)
 “R software was used to obtain data values of digital banking losses processed by
MEBoot. In addition, threshold value with 10% percentage and lots of extreme data
above the threshold were obtained”

 Lines 330-331: it is not understandable, please rephrase it.

Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 10 Line 380-384)
β
“The upper limit value of 𝑥 is − . That upper limit value of 𝑥 is no more than
ξ
β
maximum values of extreme data in Table 3. − < 286932960062.233 for timeout
ξ
β
risk and − < 278181957858.857 for downtime risk. So, the maximum values of
ξ
extreme data did not pass through from upper limit value. This shows the suitability
of the GPD parameter estimator value.”

 This statement is too general, and in this form has no meaning: "Since the global
financial crisis, ... operational risk management has not been able to be handled
effectively." (lines 363-365)
Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 11 Line 415-419)
“The global financial crisis has awakened the importance of studying extreme
events. the implementation of EVT is the main step in mitigating operational risk.
However, operational risk management still cannot be handled effectively. On
reason is that operational risk is more complex, involving many types of risk, and is
not always easy to measure”

 Lines 341-342: it is not understandable, please rephrase it.

Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 11 Line 392-397)
“ EVaR 1 and EVaR 2 show the value of potential losses from the risk of timeout and
service downtime. However, it is necessary to combine these EVaR values to
represent the risk of digital banking transactions. The combined EVaR becomes the
maximum potential loss from banking transaction risk. The EVaR risk value
 combination process was carried out by weighting each EVaR risk. The weight of
risks calculation results based on the portfolio approach using equation (12) are
shown in Table 5”

 This statement is too general: "If banks cannot provide these reserve 430 funds, it is
feared that a collapse will occur. The collapse occurs because of the unpreparedness
of reserve funds to cover losses." (lines 430-431)
Response:
Dear Reviewer,
Thank you for your comments and suggestions, here are the responses that we have
corrected according to your directions.
(Page 13 Line 490-494)
“If banks cannot provide these reserve funds, it is feared that a collapse will occur.
In particular, unexpected extreme events such as the global financial crisis can
occur at any time. So if this happens, the unpreparedness of reserve funds can
certainly make the bank company collapse. Therefore, the potential for maximum
loss is an important concern for risk mitigation efforts”