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Federal Reserve Bank of Boston
Working Papers
Implications of alternative operational risk modeling techniques
Patrick de Fontnouvelle
Eric S. Rosengren
John S. Jordan
Abstract

Quantification of operational risk has received increased attention with the inclusion of an explicit capital charge for operational risk under the new Basle proposal. The proposal provides significant flexibility for banks to use internal models to estimate their operational risk, and the associated capital needed for unexpected losses. Most banks have used variants of value at risk models that estimate frequency, severity, and loss distributions. This paper examines the empirical regularities in operational loss data. Using loss data from six large internationally active banking institutions, we find that loss data by event types are quite similar across institutions. Furthermore, our results are consistent with economic capital numbers disclosed by some large banks, and also with the results of studies modeling losses using publicly available “external” loss data.


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Patrick de Fontnouvelle & Eric S. Rosengren & John S. Jordan, Implications of alternative operational risk modeling techniques, Federal Reserve Bank of Boston, Working Papers 04-9, 2004.
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Keywords: Bank capital ; Risk management ; Basel capital accord
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