Operational risk modelled analytically

Vivien Brunel
26 Jun 2014

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The current regulatory framework allows banks to compute their capital charge for operational risk under an internal model, which is often based on the loss distribution approach (LDA). Loss distributions are calibrated at the cell level (a cell is the elementary risk unit per business line and type of risk) and the bank's capital charge is estimated by aggregating cell loss distributions under some dependence assumption (Chernobai, Rachev & Fabozzi 2007).

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