Abstract

http://ssrn.com/abstract=1032523
 
 

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Loss Distribution Approach for Operational Risk


Antoine Frachot


National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Pierre Georges


Credit Lyonnais Asset Management

Thierry Roncalli


Lyxor Asset Management

March 30, 2001


Abstract:     
In this paper, we explore the Loss Distribution Approach (LDA) for computing the capital charge of a bank for operational risk where LDA refers to statistical/actuarial methods for modelling the loss distribution. In this framework, the capital charge is calculated using a Value-at-Risk measure. In the first part of the paper, we give a detailed description of the LDA implementation and we explain how it could be used for economic capital allocation. In particular, we show how to compute the aggregate loss distribution by compounding the loss severity distribution and the loss frequency distribution, how to compute the total Capital-at-Risk using copulas, how to control the upper tail of the loss severity distribution with order statistics. In the second part of the paper, we compare LDA with the Internal Measurement Approach (IMA)proposed by the Basel Committee on Banking Supervision to calculate regulatory capital for operational risk. LDA and IMA are bottom - up internal measurement models which are apparently different. Nevertheless, we could map LDA into IMA and give then some justifications about the choice done by regulators to define IMA. Finally, we provide alternative ways of mapping both methods together.

Number of Pages in PDF File: 43

Keywords: Operational risk, aggregated loss, compound distribution, loss severity, loss frequency, Panjer algorithm, Capital-at-Risk, economic capital allocation, order statistics, LDA, IMA, RPI, copulas.

JEL Classification: G00

working papers series


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Date posted: November 26, 2007  

Suggested Citation

Frachot, Antoine and Georges, Pierre and Roncalli, Thierry, Loss Distribution Approach for Operational Risk (March 30, 2001). Available at SSRN: http://ssrn.com/abstract=1032523 or http://dx.doi.org/10.2139/ssrn.1032523

Contact Information

Antoine Frachot
National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )
15 Boulevard Gabriel Peri
15 Boulevard Gabriel Peri
92245 Malakoff Cedex, 1 92245
France
Pierre Georges
Credit Lyonnais Asset Management ( email )
75002 Paris
France
Thierry Roncalli (Contact Author)
Lyxor Asset Management ( email )
Paris
France
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