Numerical Modelling Of Operational Risks For
The Banking Industry
Author(s)
R. Barreira, T. Pryer & Q. Tang
Abstract
In Basel II Capital Accord, the Advanced Measurement Approaches (AMA) is
stated as one of the pillar stone methods for calculating corporate risk reserves.
One of the common yet cumbersome methods is the one known as loss
distribution approach. In this article, we present an easy to implement scheme
through electronic means and discuss some of the mathematical problems we
encountered in the process together with proposed solution methods and further
thought on the issues.
Keywords: loss distribution, bottom-up approach, operational risk, Monte-Carlo
simulation.
1 Introduction
In Basel II Capital Accord, the use of top-down or bottom-up method to
calculate risk provisions are recommended as the ways to model and compute
corporate risk value (VaR – values at risk). We mainly discuss the bottom-up
approach. For this approach, there are process based models, actuarial models
and proprietary models.
The process based model splits banking activities into simple business steps,
the management evaluates the situation according to these steps to identify risks.
This is mainly a time series type of model. Regressional analysis tools are often
used when there are multi-factors in the problem (cf. [1, 2, 5–7]).
The actuarial models or statistics models are generally parametric statistical
models. Various statistical fitting techniques are used (see extensive discussions
in [3]). In this article, we present an efficient, direct way for this approach and
we also discuss some of the technical difficulties that need to be solved.
Keywords
loss distribution, bottom-up approach, operational risk, Monte-Carlo
simulation.
Related Book
Other papers in this volume
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