Regulatory approval report

Rafael Cavestany

Previous chapters have described different steps to build a state-of-the-art operational risk capital model with all the required elements. These elements permit the creation of a solid model for the determinations of capital estimates.

Banks and insurance companies may use these capital estimates for regulatory compliance, such as the Internal Capital Adequacy Assessment Process (ICAAP), regulatory stress-test exercises and others, as mentioned in previous chapters. Regulatory authorities request the validation of the models used for capital requirement purposes.

Model validation is submitted to regulatory authorities via a regulatory approval document. Regulators’ standard requirement on approval regulatory reporting is that such a report should allow the full replication of model results if the report is given to an independent analyst. This requires the documentation of all model assumptions, end-to-end starting with the selection of loss data and/or scenarios, to the Monte Carlo simulation parameters, passing through the details of the modelling assumptions and how all the different information elements have been merged into the model.

This chapter will present

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