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A Simple method for regulators to cross-check operational risk loss models for banks

Wayne Holland*; ManMohan S. Sodhi*Cass Business School, City University London, UK

Abstract

Under Basel II, banks are encouraged to develop their own advanced measurement approaches (AMA), allowing different approaches to flourish. However, this flexibility may pose a problem for the regulators in approving a particular bank’s proposed capital requirement as indicated by the bank’s own AMA model. We propose a simple method for regulators to cross-check any bank’s proposed capital reserve using a lower bound function on the capital requirement. This bound is a function of the weight of the bank’s estimate of its expected losses relative to the pooled loss experience ...

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