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Benchmarking Operational Risk Stress Testing Models

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Abstract

The Federal Reserve?s Comprehensive Capital Analysis and Review (CCAR) requires large bank holding companies (BHCs) to project losses under stress scenarios. In this paper, we propose multiple benchmarks for operational loss projections and document the industry distribution relative to these benchmarks. The proposed benchmarks link BHCs? loss projections with both financial characteristics and metrics of historical loss experience. These benchmarks capture different measures of exposure and together provide a comprehensive view of the reasonability of model outcomes. Furthermore, we employ several approaches to assess the conservatism of BHCs? stress loss projections and our estimates for the conservatism of loss projections for the median bank range from the 90th percentile to above the 99th percentile of the operational loss distribution.

Suggested Citation

  • Filippo Curti & Marco Migueis & Rob T. Stewart, 2019. "Benchmarking Operational Risk Stress Testing Models," Finance and Economics Discussion Series 2019-038, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2019-38
    DOI: 10.17016/FEDS.2019.038
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    File URL: https://www.federalreserve.gov/econres/feds/files/2019038pap.pdf
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    References listed on IDEAS

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    1. Weidong Tian & Azamat Abdymomunov & Ibrahim Ergen, 2017. "Tail Dependence and Systemic Risk in Operational Losses of the US Banking Industry," International Review of Finance, International Review of Finance Ltd., vol. 17(2), pages 177-204, June.
    2. Cope, Eric W. & Piche, Mark T. & Walter, John S., 2012. "Macroenvironmental determinants of operational loss severity," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1362-1380.
    3. repec:cup:jfinqa:v:46:y:2011:i:06:p:1683-1725_00 is not listed on IDEAS
    4. Filippo Curti & Marco Migueis, 2016. "Predicting Operational Loss Exposure Using Past Losses," Finance and Economics Discussion Series 2016-2, Board of Governors of the Federal Reserve System (U.S.).
    5. Azamat Abdymomunov & Filippo Curti & Atanas Mihov, 2020. "U.S. Banking Sector Operational Losses and the Macroeconomic Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(1), pages 115-144, February.
    6. Allen, Linda & Bali, Turan G., 2007. "Cyclicality in catastrophic and operational risk measurements," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1191-1235, April.
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    Cited by:

    1. Til Schuermann, 2020. "Capital Adequacy Pre‐ and Postcrisis and the Role of Stress Testing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 87-105, October.

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    More about this item

    Keywords

    Benchmarking; Operational Risk; Stress Testing;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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