Publication

Operational Risk

2010

Abstract

Under the capital requirements of the Basel II regime, banks have to provide estimates of their operational risk on a yearly basis and, for larger international banks, use a Value-at- Risk estimate at the confidence level of 99.9%. The so-called loss distribution approach (LDA) allows for broad methodological flexibility for the estimation of this risk capital. In this article, we discuss some of the underlying statistical issues.

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2010

Abstract

Official source

Related concepts (32)

Capital requirement

A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet.

Operational risk

Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can trigger operational risk. The process to manage operational risk is known as operational risk management.

Financial risk management

Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to address them. See for an overview. Financial risk management as a "science" can be said to have been born with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection"; see .

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