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Shapley Allocation, Diversification and Services in Operational Risk

Author

Listed:
  • Peter Mitic

    (Santander UK)

  • Bertrand K. Hassani

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Santander UK)

Abstract

A method of allocating Operational Risk regulatory capital using the Shapley method for a large number of business units, supported by a service, is proposed. A closed-form formula for Shapley allocations is developed under two principal assumptions. First, if business units form coalitions, the value added to the coalition by a new entrant depends on a constant proportionality factor. This factor represents the diversification that can be achieved by combining operational risk losses. Second, that the service should reduce the capital payable by business units, and that this reduction is calculated as an integral part of the allocation process. We ensure that allocations of capital charges are acceptable to and are understandable by both risk and senior managers. The results derived are applied to recent loss data.

Suggested Citation

  • Peter Mitic & Bertrand K. Hassani, 2015. "Shapley Allocation, Diversification and Services in Operational Risk," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01179042, HAL.
    • Handle: RePEc:hal:cesptp:halshs-01179042
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01179042
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    Keywords

    Allocation; Shapley; Operational Risk; Diversification; Service; Game Theory; Capital Value;
    All these keywords.

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