Loss Distribution Approach for Operational Risk Capital Modelling under Basel II: Combining Different Data Sources for Risk Estimation
AbstractThe management of operational risk in the banking industry has undergone significant changes over the last decade due to substantial changes in operational risk environment. Globalization, deregulation, the use of complex financial products and changes in information technology have resulted in exposure to new risks very different from market and credit risks. In response, Basel Committee for banking Supervision has developed a regulatory framework, referred to as Basel II, that introduced operational risk category and corresponding capital requirements. Over the past five years, major banks in most parts of the world have received accreditation under the Basel II Advanced Measurement Approach (AMA) by adopting the loss distribution approach (LDA) despite there being a number of unresolved methodological challenges in its implementation. Different approaches and methods are still under hot debate. In this paper, we review methods proposed in the literature for combining different data sources (internal data, external data and scenario analysis) which is one of the regulatory requirement for AMA.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1306.1882.
Date of creation: Jun 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-16 (All new papers)
- NEP-BAN-2013-06-16 (Banking)
- NEP-CBA-2013-06-16 (Central Banking)
- NEP-RMG-2013-06-16 (Risk Management)
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- Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2635-2658, October.
- Bakhodir Ergashev, 2012. "A Theoretical Framework for Incorporating Scenarios into Operational Risk Modeling," Journal of Financial Services Research, Springer, vol. 41(3), pages 145-161, June.
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