Two-regime approach saves up to 30% op risk capital
Modelling shift to 'crisis mode' mitigates pro-cyclical calculations
Operational risk losses can be better predicted – and capital more accurately computed – assuming banks operate in one of two regimes at any point, according to forthcoming research using loss data from US banks.
Georges Dionne and Samir Hassani of Canada's HEC Montreal business school used data over the period 2001 to 2010 to show operational risk losses were not homogenous over time.
Instead, institutions tend to alternate between long stretches of a baseline ‘low' regime, in which losses
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