What is operational Risk?
Risk of loss due to failed internal process, people and system or external events. E.g.: Internal fraud, damage to physical assets, …
What are the Peculiarities of operational Risk?
Financial institutions do not decide to take operational risk
Risk is inherent to business
No hedging instruments
Leads only to losses, no returns
Different business lines, different risk (highest in retail banking)
What are the characteristics of severity and frequency of operational risk?
High severity and low frequency or low frequency and high severity
—> Severity distribution is skewed to right and lepotkurtic
—> Loss frequency can be estimated from banks data
—> Loss Severity is based on historical data (Monte Carlo=
What is regulatory capital? When and where was it introduced for operational risk?
Capital required by regulator to be held by financial institutions.
It is a minimum capital requirement introduced in Basel 2, First Pillar.
Explain the Basic Indicator, Standardized approach and Advanced Measurement Approach for the Operational Risk capital charge:
How does the Standardized Measurement Approach (SMA) differ from the Advanced Measurement Approach? How does it work?
SMA offers more consistency in calculation of operational risk across banks
Consiting of two main components:
Business Indicator Component (BIC)
measure of income that increases with a bank’s size
5 BIC classes, higher BIC higher coefficient
Loss Components (LC)
effective losses of a bank
from these compnents we can calculate the Internal Loss Multiplier (ILM)
Final version from Basel 3:
Name two procedures how to analyze the severity distributions:
Block Maxima
divide sample in subsamples and analyze maxima of those
Peaks over threshold
Analysis only on data exceeding a threshold
What are advantages and disadvantages of Basic Indicator, Standardized Approach, and Advanced measurement approach?
Last changed2 years ago
