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Implications of Alternative Operational Risk Modeling Techniques

  • Patrick de Fontnouvelle
  • John Jordan
  • Eric Rosengren

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.

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File URL: http://www.nber.org/papers/w11103.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11103.

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Date of creation: Feb 2005
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Publication status: published as Carey, Mark and Rene M. Stulz (eds.) The Risks of Financial Institutions A National Bureau of Economic Research Conference Report. Chicago and London: University of Chicago Press, 2006.
Handle: RePEc:nbr:nberwo:11103
Note: AP
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Beverly J. Hirtle, 2003. "What market risk capital reporting tells us about bank risk," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 37-54.
  2. repec:ner:tilbur:urn:nbn:nl:ui:12-125712 is not listed on IDEAS
  3. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
  4. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
  5. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
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