Can Operational Risk Models Deal with Unprecedented Large Banking Losses?
Duc Pham-Hi
Banks calculating Basel II operational risk charge are required to include scenarios for very large losses along with internal loss data. However, apart from methodological precautions to avoid human expert bias, banks that statistically integrate quantitative scenarios—as well as the supervisor—have to keep an eye on several pitfalls. This chapter explores and illustrates a few combinations of techniques leading to situations where scenarios-based Basel II Advanced Measurement Approaches can have unexpected influences on the result of value at risk.


One of the main characteristics of the current financial crisis is the size of losses. Asset reevaluation has shown several write-downs and write-offs in billions of dollars. According to a recent estimate, the four larger French banks, together with Credit Suisse and Deutsche Bank, lost almost US$30 billion by the first quarter 2008. Around the world, together they might total several times over the near systemic Long Term Capital Management catastrophe.
In the Advanced Measurement Approach (AMA) modeling of operational risk in the Basel II regulation context, the question is not whether it is necessary to incorporate these now not-so-unexpected losses in the regulatory capital called Pillar I calculation. It is how to do so without either losing credibility in the eyes of the supervisor because of too ...

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