Title: Combining historical data sources in operational risk capital estimation
Authors: Helgard Raubenheimer - North-West University (South Africa) [presenting]
Riaan de Jongh - North-West University (South Africa)
Mentje Gericke - North-West University (South Africa)
Abstract: The management of financial losses is crucial as banks must set aside regulatory capital to absorb unexpected losses. Banks also calculate economic capital to ensure solvency according to their risk profile. The main financial risks faced by banks are market-, credit-, and operational risks. Operational risk includes fraud, improper business practices, and so on. The annual aggregate distribution of expected losses is determined to calculate the capital needed to withstand this risk. The extreme quantiles of this distribution are of specific interest. For instance, a bank should hold capital to survive a one-in-a-thousand-year aggregate operational loss (the 99.9\% VaR of the distribution). However, companies often have limited internal data available to model the distribution accurately and therefore use external sources and scenario assessments to supplement their data. We show how data sources can be integrated into the capital modelling process. We also suggest measures to challenge experts to adjust scenario assessments based on historical data.