Implementing loss distribution approach for operational risk

Authors

  • Pavel V. Shevchenko

    Corresponding author
    1. CSIRO Mathematical and Information Sciences, Sydney, Locked Bag 17, North Ryde, NSW 1670, Australia
    • CSIRO Mathematical and Information Sciences, Sydney, Locked Bag 17, North Ryde, NSW 1670, Australia
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Abstract

In order to quantify the operational risk capital charge under the current regulatory framework for banking supervision, referred to as Basel II, many banks adopt the loss distribution approach. There are many modeling issues that should be resolved to use this approach in practice. In this paper we review the quantitative methods suggested in the literature for the implementation of the approach. In particular, the use of Bayesian inference that allows one to take expert judgement and parameter uncertainty into account, modeling dependence, and inclusion of insurance are discussed. Copyright © 2009 John Wiley & Sons, Ltd.

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