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An application of capital allocation principles to operational risk

Author

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  • Urbina, Jilber
  • Guillén, Montserrat

Abstract

The cost of operational risk refers to the capital needed to a fford the loss generated by ordinary activities of a firm. In this work we demonstrate how allocation principles can be used to the subdivision of the aggregate capital so that the firm can distribute this cost across its various constituents that generate operational risk. Several capital allocation principles are revised. Proportional allocation allows to calculate a relative risk premium to be charged to each unit. An example of fraud risk in the banking sector is presented and some correlation scenarios between business lines are compared. Keywords: solvency, quantile, value at risk, copulas

Suggested Citation

  • Urbina, Jilber & Guillén, Montserrat, 2013. "An application of capital allocation principles to operational risk," Working Papers 2072/222201, Universitat Rovira i Virgili, Department of Economics.
    • Handle: RePEc:urv:wpaper:2072/222201
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    Cited by:

    1. Jilber Urbina & Miguel Santolino & Montserrat Guillen, 2021. "Covariance Principle for Capital Allocation: A Time-Varying Approach," Mathematics, MDPI, vol. 9(16), pages 1-13, August.
    2. Bashir Ahmad & Maria Ciupac-Ulici & Daniela-Georgeta Beju, 2021. "Economic and Non-Economic Variables Affecting Fraud in European Countries," Risks, MDPI, vol. 9(6), pages 1-17, June.
    3. Boonen, Tim J. & Guillen, Montserrat & Santolino, Miguel, 2019. "Forecasting compositional risk allocations," Insurance: Mathematics and Economics, Elsevier, vol. 84(C), pages 79-86.
    4. Kamil J. Mizgier & Joseph M. Pasia & Srinivas Talluri, 2017. "Multiobjective capital allocation for supplier development under risk," International Journal of Production Research, Taylor & Francis Journals, vol. 55(18), pages 5243-5258, September.

    More about this item

    Keywords

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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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