Operational Risk Stress Testing

Lourenco Miranda

This chapter will cover operational risk and its role in the CCAR exercise. Operational risk is an element of the PPNR as part of the non-interest expenses. As operational risk losses are considered an expense, we are interested in the expected loss and not in the far tails of the loss distribution. This is a very important concept that should be clarified from the start – what is being stressed here are not the parameters or quantiles of the loss distribution or the capital itself. As far as CCAR is concerned, as well as the role of operational risk loss projections as an element of non-interest expenses of PPNR, what we are stressing are loss expectations.

It all started back in September 1998, when the BCBS issued the first-ever paper on operational risk.11Basel Committee on Banking Supervision (1998). At that time, there was no agreed universal definition of operational risk by the industry. Many banks defined operational risk as any risk not categorised as market or credit risk, while some defined it as the risk of loss arising from various types of human or technical error. The paper stated that the Basel Committee had initiated for the first time a systematic work related

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