Journal of Operational Risk

Risk.net

A simple, transparent and rational weighting approach to combining different operational risk data sources

Alexis Renaudin and Matthew Grant

ABSTRACT

According to Basel financial regulations, the use of external data is indispensable to the implementation of an advanced measurement approach (AMA) for calculating operational risk capital. This paper aims to provide a simple solution to perhaps the most challenging step in building any capital model for operational risk: the integration of internal and external data. We propose a generic weighting function based on a nonparametric approach that can be used to weight the different distributions; this is in line with regulatory requirements under the AMA. After analyzing the different driving factors and considering the desired sensitivities of the weights, we build and calibrate a weighting function to match all necessary and relevant conditions. This approach is completely flexible (it can be used with different constraints or adapted so that its sensitivity depends on the risk profile of the bank) while at the same time highly tractable.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here