The regulatory loss cut-off level: Does it undervalue the operational capital at risk?

  1. Jiménez-Rodríguez, Enrique
  2. Feria Domínguez, José Manuel
  3. Martín Marín, José luis
Revista:
The Spanish Review of Financial Economics

ISSN: 2173-1268

Año de publicación: 2011

Volumen: 9

Número: 2

Páginas: 49-54

Tipo: Artículo

DOI: 10.1016/J.SRFE.2011.09.003 DIALNET GOOGLE SCHOLAR lock_openAcceso abierto editor

Otras publicaciones en: The Spanish Review of Financial Economics

Resumen

The New Capital Accord (Basel II) proposes a minimum threshold of 10,000 Euros for operational losses when estimating regulatory capital for financial institutions. But since this recommendation is not compulsory for the bank industry, banks are allowed to apply internal thresholds discretionally. In this sense, we analyze the potential impact that the selection of a specific threshold could have on the final estimation of the capital charge for covering operational risk, adopting a critical perspective. For this purpose, by using the Internal Operational Losses Database (IOLD) provided by a Spanish Saving Bank, we apply the Loss Distribution Approach (LDA) for different modelling thresholds. The results confirm the opportunity cost in which banks can incur depending on the internal threshold selected. In addition, we consider that the regulatory threshold, established by the Committee, could result inadequate for some financial institutions due to the relative short length of the current IOLDs.

Referencias bibliográficas

  • Basel Committee on Banking Supervision Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version 2006.
  • Basel Committee on Banking Supervision Working Paper on the Regulatory Treatment of Operational Risk, vol. 8 2001.
  • Baud, N., Frachot, A., Roncalli, T., 2002. How to Avoid Over-Estimating Capital Charge for Operational Risk. Working Paper, Credit Lyonnais. Available from: [November 2009]. http://www.thierry-roncalli.com/download/oprisk-mixing.pdf.
  • Böcker K., Klüppelberg C. Operational VaR: a closed-form approximation. Risk 2005, 18(12):90-93.
  • Chernobai A., Menn C., Trück S., Rachev S.T., Moscadelli M. Treatment of incomplete data in the field of operational risk: the effects on parameter estimates, EL and UL figures. The Advanced Measurement Approach to Operational Risk 2006, 145-168. Risk Books, London. E. Davies (Ed.).
  • Dutta, K., Perry, J., 2006. A Tale of Tails: An Empirical Analysis of Loss Distribution Models for Estimating Operational. Working Paper. FRB of Boston, Paper No. 06-13. Available from: [November 2009]. http://papers.ssrn.com/sol3/papers.cfm%3Fabstract_id=918880.
  • Embrechts P., Furrer H., Kaufmann R. Quantifying regulatory capital for operational risk. Derivatives Use, Trading & Regulation 2003, 9(3):217-233.
  • Feller W. An Introduction to Probability Theory and its Applications. Wiley Series in Probability and Mathematical Statistics 1971, vol. II. John Wiley & Sons, New York. 2nd ed.
  • Fontnouvelle, P., Rosengren, E., Jordan, J., 2005. Implications of Alternative Operational Risk Modelling Techniques. Working Paper, NBER, Paper No. w11103. Available from: [November 2009]. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=556823.
  • Frachot A., Moudoulaud O., Roncalli T. Loss distribution approach in practice. The Basel Handbook: A Guide for Financial Practitioners 2004, 369-396. Risk Books, London. M. Ong (Ed.).
  • Frachot, A., Roncalli, T., Salomon, E., 2004b. The Correlation Problem in Operational Risk. Working Paper, Credit Lyonnais. Available from: [November 2009]. http://papers.ssrn.com/sol3/papers.cfm%3Fabstract_id=1032594.
  • Klugman S., Panjer H., Willmot G. Loss Models: from Data to Decisions 2004, John Wiley & Sons, New York. 2nd ed.
  • Luo X., Shevchenko P.V., Donnelly J.B. Addressing the impact of data truncation and parameter uncertainty on operational risk estimates. The Journal of Operational Risk 2007, 2(4):3-26.
  • McNeil A., Saladin T. The peaks over thresholds method for estimating high quantiles of loss distributions. Proceedings of 28th International ASTIN Colloquium 1997, 23-43.
  • Mignola G., Ugoccioni R. Effect of a data collection threshold in the loss distribution approach. The Journal of Operational Risk 2006, 1(4):35-47.
  • Moscadelli M. The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee. Operational Risk: Practical Approaches to Implementation 2005, 39-104. Risk Books, London. E. Davis (Ed.).
  • Shevchenko P., Temnov G. Modelling operational risk data reported above a time-varying threshold. The Journal of Operational Risk 2009, 4(2):19-42.
  • Tukey J.W. Exploratory Data Analysis 1977, Addison-Wesley, Reading, MA.
Fuente de los datos: Dialnet