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Implications of Alternative Operational Risk Modeling Techniques
Year Of Publication: 2004
Month Of Publication: June
Pages: 45
Download Count: 810
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 1-31-2005
Publisher: Administrator
Quantification of operational risk has received increased attention with theinclusion of an explicit capital charge for operational risk under the newBasle proposal. The proposal provides significant flexibility for banks to useinternal models to estimate their operational risk, and the associated capitalneeded for unexpected losses. Most banks have used variants of value at riskmodels that estimate frequency, severity, and loss distributions. This paperexamines the empirical regularities in operational loss data. Using loss datafrom six large internationally active banking institutions, we find that lossdata by event types are quite similar across institutions. Furthermore, ourresults are consistent with economic capital numbers disclosed by some largebanks, and also with the results of studies modeling losses using publiclyavailable “external” loss data.* This paper was prepared for the NBER Project on the Risks of Financial Institutions. It was substantiallycompleted while John Jordan was with the Federal Reserve Bank of Boston. We thank our colleagues in the FederalReserve System and in the Risk Management Group of the Basel Committee for the many fruitful interactions thathave contributed to this work. However, the views expressed in this paper do not necessarily reflect their views,those of the Federal Reserve Bank of Boston, or those of the Federal Reserve System. Address for correspondence:Patrick de Fontnouvelle, Federal Reserve Bank of Boston, Mail Stop T-10, 600 Atlantic Avenue, P.O. Box 2076,Boston, MA 02106-2076, tel: 617-973-3659, fax: 617-973-3219, email: patrick.defontnouvelle@bos.frb.or
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