Diversification benefit of operational risk

A granular classification of operation risk classes, based on event types and business lines, can have a significant impact on the value-at-risk through correlation assumptions across risk classes. Here, Roberto Torresetti and Giacomo Le Pera explore the relevance of the diversification benefit and find that, in practice, there is room to reap a significant diversification benefit, thus pointing to a relatively slow convergence of the theoretical result that instead implies an asymptotically zero benefit

The regulator definition of operational risk is the loss expected over the next 12 months deriving from losses resulting from inadequate or failed internal processes, people and systems or from external events (excluding reputational and strategic risk).

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Where market or credit risk can be thought of as a function of the bank's portfolio, operational risk can be thought