2008 Loss Data Collection Exercise results released

Two papers from the Basel Committee on Banking Supervision have been published that contain the results of the 2008 Operational Risk Loss Data Collection Exercise

BASEL - The Basel Committee on Banking Supervision has published the results of the 2008 Loss Data Collection Exercise (LDCE), which was conducted by the Standards Implementation Group for Operational Risk. The first paper, Results from the 2008 Loss Data Collection Exercise for operational risk, focuses on internal loss data and scenario analysis as well as on operational risk capital, while the second, Observed range of practice in key elements of advanced measurement approaches (AMA), covers external loss data and business environment and internal control factors, as well as the observed range of practice in banks employing the AMA for operational risk.

The main findings show firms have made considerable progress in the collection and use of internal loss data since the last LDCE, conducted in 2002. However, there remains a great deal of variance in how firms are collating and scaling data. The frequency of internal losses of €20,000 or more varies significantly across regions when the data is scaled by various exposure indicators. But despite the regional variation in loss frequency, some consistency was observed in the severity distribution of operational losses across regions.

For many banks, scenario data was found to extend the tail of the loss distribution beyond the point at which a bank had experienced internal losses. At many banks, the number of large scenarios greater than €10 million is approximately 20 times larger than the number of internal losses that are greater than this amount. But although the number of large scenarios exceeds the number of large internal losses, the frequency of large losses implied by scenarios and internal data are broadly consistent among AMA banks.

AMA banks were found to have a higher frequency of internal losses greater than €100,000 than non-AMA banks, even when the data was scaled by exposure indicators. The paper explains that some of this difference can be accounted for because AMA banks are generally larger, more complex banks with more mature processes for collecting loss data.

The last finding is that taking the AMA approach to operational risk does result in less capital. Operational risk capital for non-AMA banks was found to be higher than for AMA banks, regardless of the exposure indicator used for scaling. For the typical AMA bank, the ratio of operational risk capital to gross income (10.8%) is below the alpha for the basic indicator approach (15%) and also below the range of betas for the standardised approach (12% - 18%). Also, the amount of capital relative to the frequency of large losses is generally higher at non-AMA banks than at AMA banks.

The observed range of practice paper updates a 2006 report of the same name. In framing the discussion of observed practice in the measurement and management of operational risk, the update identifies both emerging effective practices and practices that are inconsistent with supervisory expectations; highlights supervisory issues encountered in the supervisory reviews of operational risk, whether related to governance, data or modelling; and provides a resource for banks and national supervisors to use in their respective implementation processes, and ongoing development and monitoring of AMA frameworks.

Click here to access the LDCE results.

Click here to access the ROP paper.