Implication of Alternative Operational Risk Modeling Techniques"Quantification of operational risk has received increased attention with the inclusion of an explicit capital charge for operational risk under the new Basle proposal. The proposal provides significant flexibility for banks to use internal models to estimate their operational risk, and the associated capital needed for unexpected losses. Most banks have used variants of value at risk models that estimate frequency, severity, and loss distributions. This paper examines the empirical regularities in operational loss data. Using loss data from six large internationally active banking institutions, we find that loss data by event types are quite similar across institutions. Furthermore, our results are consistent with economic capital numbers disclosed by some large banks, and also with the results of studies modeling losses using publicly available "external" loss data"--National Bureau of Economic Research web site. |
Common terms and phrases
99.9th percentile aggregate loss distribution analysis Atlantic Avenue Boston Bank B Bank Bank D Bank Bank F Burr banks under consideration Basel Business Lines Basel Committee behavior of operational Business Practices DEDH plots distributed random variable Distribution Bank economic capital Employment Practices event types Exponential 0.0 exponential distribution external data External Fraud Extreme Value Theory Figure fixed effects frequency distribution Gamma distributed heavy-tailed distributions Hill estimator Hill plots HKKP Koedijk LDCE data light-tailed distribution linear lines and event LogGamma Lognormal distribution lognormal parameter loss events loss severity distribution losses exceeding mean excess plot minimum regulatory capital modeling operational loss Negative Binomial distribution number of exceedances number of loss operational loss data operational risk Panel Pareto distribution point estimates Poisson distribution Practices and Workplace Products and Business Retail Banking Risk Management sample six banks statistical tail behavior tail index parameter tail parameter estimates tail plots techniques threshold plots Workplace Safety