Advanced model of calculation of Capital for operational risk: top-down approach

Estefanía González Carbonell

doi:10.26360/2020_8

Authors

Estefanía González Carbonell Universidad Carlos III de Madrid (España)

DOI:

https://doi.org/10.26360/2020_8

Keywords:

operational risk, loss distribution approach, capital at risk, risk appetite, value at risk

Abstract

The Entities are exposed to disruptive events derived from operational risk. To provide coverage against this risk, an advanced model has been developed to quantify the Economic Capital required to cover losses due to the said risk. The model is based on the Loss Distribution Approach (LDA), the Monte Carlo simulation and the Value at Risk measure, using only historical internal loss data. The model uses a “top-down” approach which consists in the calculation of the total Capital in the first instance and later the disaggregation of it among the Basel Cells. The model proves to be robust by capturing the Entity's true risk profile, solving the problem of data scarcity and achieving the maximum level of ex post granularity.

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