The problems with conduct risk loss aggregation

Aggregation of conduct risk losses is recommended practice, but it can seriously distort capital calculations

Pile of crates
Collection time: grouping together loss events can be hazardous

Peter Mitic is the UK head of operational risk methodology at Santander

When a large number of very small losses, such as conduct risk loss events, are aggregated into a small number of very large losses, modelling regulatory capital becomes difficult. Capital models attempt to assign a severity distribution and the frequency distribution to empirical data. In practice, the traditional severity distributions have been “fat-tailed”. These distributions are useful for modelling a small number of

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