Operational Risk - Rgulatory Capital Under Basel II

6 important questions on Operational Risk - Rgulatory Capital Under Basel II

What did basil II say about operational risk

Banks still need to hold capital to cover operational risk, but what the operational risk is, can be measured in three different ways.

What are the three different methods?


1. Basic indicator approach. Operational risk capital is set equal to 15% of annual gross income over the previous three years.
2. Standarized approach, a slightly more complicated approach. The approach entails to devide the bank into eight business lines, the average gross income over the last three years for each business line is multiplied with a beta factor and that amount summed is determining the total capital for operational risk.
3. The third approach is the advanced measurement approach.

What does the AMA (Advanced Measurement Approach) do?

The approach calculates the one-year 99% VaR for operational risk losses
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How to calculate VaR under AMA?

For each business line and each operational risk, a seperate VaR needs to be calculated. This are 56 VaRs. All of these VaRs can be combined into one overall VaR

Where can data about operational risks be obtained?

Data can be obtained via Data Sharing of bought at Data Vendors.

How can external data be scaled to internal data, when the revenue (size) of the banks differs?

By multiply ((bank A revenue/Bank B revenue) ^a) * observed losses for bank B. Alpha is estimated to be 0.23 when using external data

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