Correlation of op risk losses could send capital soaring

BB&T auditor's model shows capital measured by LDA might be pushed up by 16–55%

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Op risk capital may inflate if correlation is considered by LDA models

The assumption that operational risk losses are independent and identically distributed (IID) might be leading banks to underestimate their capital levels; and if losses are correlated, op risk capital may be between 16% and 55% higher, according to research by Daniel Stahl, senior internal auditor at US bank BB&T.

"If you have a very severe loss, it will attract management focus and all sorts of resources will be focused on that issue," says Stahl. "That possibly leaves other parts of the bank

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