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New results on the correlation problem in operational risk

Author

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  • BRUNEL, Vivien

    (Société Générale)

Abstract

Internal models of operational risk are all built based on the same guidelines provided by the regulators. However, we observe a broad range of practices among banks concerning modeling choices and calibration methods. It is thus relevant to discuss the relative importance of the main drivers and modeling choices of the operational risk capital charge. Many studies in the literature have focused on the modeling of the tails in the severity distributions. In this paper, we use a class of analytical models for operational risk in order to assess the relative importance of all parameters of the model. In particular, we show that the bank’s capital charge is not very sensitive to the dispersion in correlations, the average level of correlations being a much more critical parameter of the operational risk capital charge. We show that the assumption of uniform correlations is robust, contrary to what is often advised by internal auditors or regulators.

Suggested Citation

  • BRUNEL, Vivien, 2014. "New results on the correlation problem in operational risk," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(2), pages 123-129.
    • Handle: RePEc:ris:jofipe:0057
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    Cited by:

    1. Lu Wei & Jianping Li & Xiaoqian Zhu, 2018. "Operational Loss Data Collection: A Literature Review," Annals of Data Science, Springer, vol. 5(3), pages 313-337, September.

    More about this item

    Keywords

    risk;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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