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Loss Distribution Approach for Operational Risk Capital Modelling under Basel II: Combining Different Data Sources for Risk Estimation

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  • Pavel V. Shevchenko
  • Gareth W. Peters

Abstract

The 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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  • Pavel V. Shevchenko & Gareth W. Peters, 2013. "Loss Distribution Approach for Operational Risk Capital Modelling under Basel II: Combining Different Data Sources for Risk Estimation," Papers 1306.1882, arXiv.org.
    • Handle: RePEc:arx:papers:1306.1882
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    References listed on IDEAS

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    1. Embrechts, Paul & Neslehová, Johanna & Wüthrich, Mario V., 2009. "Additivity properties for Value-at-Risk under Archimedean dependence and heavy-tailedness," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 164-169, April.
    2. Bakhodir Ergashev, 2012. "A Theoretical Framework for Incorporating Scenarios into Operational Risk Modeling," Journal of Financial Services Research, Springer;Western Finance Association, vol. 41(3), pages 145-161, June.
    3. Ganegoda, Amandha & Evans, John, 2013. "A scaling model for severity of operational losses using generalized additive models for location scale and shape (GAMLSS)," Annals of Actuarial Science, Cambridge University Press, vol. 7(1), pages 61-100, March.
    4. 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.
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    Cited by:

    1. Michal Vyskoèil, 2020. "Scenario Analysis Approach for Operational Risk in Insurance Companies," ACTA VSFS, University of Finance and Administration, vol. 14(2), pages 153-165.
    2. Stefanescu, Razvan & Dumitriu, Ramona, 2015. "Alegerea soluţiilor pentru expunerile faţă de risc [Choosing solutions to risk exposures]," MPRA Paper 65074, University Library of Munich, Germany.

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