Working Paper

Benchmarking Operational Risk Stress Testing Models

Abstract: The Federal Reserve?s Comprehensive Capital Analysis and Review (CCAR) requires large bank holding companies (BHCs) to project losses under stress scenarios. In this paper, we propose multiple benchmarks for operational loss projections and document the industry distribution relative to these benchmarks. The proposed benchmarks link BHCs? loss projections with both financial characteristics and metrics of historical loss experience. These benchmarks capture different measures of exposure and together provide a comprehensive view of the reasonability of model outcomes. Furthermore, we employ several approaches to assess the conservatism of BHCs? stress loss projections and our estimates for the conservatism of loss projections for the median bank range from the 90th percentile to above the 99th percentile of the operational loss distribution.

Keywords: Benchmarking; Operational Risk; Stress Testing;

JEL Classification: G28; G21; G32;

https://doi.org/10.17016/FEDS.2019.038

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2019-05-28

Number: 2019-038

Pages: 17 pages