Abstract
ABSTRACT Internal operational risk models have not yet been established as a methodology for calculating regulatory capital. These models, which must be integrated with operational risk management, have been criticized for the subjectivity of some of their fundamental elements. The purpose of this paper is to demonstrate the use of the "scenario analysis" element in the Loss Distribution Approach (LDA) methodology for calculating regulatory capital relative to operational risk, based on the experience of the Brazilian Development Bank (BNDES) in integrating operational risk management with the measurement of capital. The proposed methodology, which applied the Delphi technique through questionnaires, enabled: (i) the measurement of regulatory capital considering feasible scenarios; (ii) the identification of tail and body scenarios for the aggregate distribution of losses, which are not reflected in the internal loss database; (iii) the identification and comprehensive measurement of BNDES’s operational risks; (iv) the obtainment of information that can guide risk management with regard to identifying risks that must be given prioritized treatment; (v) the development of a risk culture, with a view to involving specialists from different units; (vi) the use of a methodology that can be understood by all business experts, who are the ones that are aware of the risks of their activities.
Highlights
Correspondence address: Macelly Oliveira Morais Banco Nacional de Desenvolvimento Econômico Avenida República do Chile, 100 – CEP 20031-917 Centro – Rio de Janeiro – RJ – Brazil
E intermediation of resources between investors and borrowers means that the commitment to the nancial equilibrium of these institutions a ects thousands of individuals and companies, as well as the local nancial system and even the international one when the operations of an institution go beyond the local nancial market
With regards to applying the scenario de nition method, Rippel and Teply (2011) presented a methodology for combining internal losses with the scenario analysis that used the worst case of loss de ned for one scenario in particular and the average loss given by a probability of loss distribution de ned for a scenario
Summary
E speci cities of the nancial system characterize it as one of the sectors that is most associated with risks. With regards to applying the scenario de nition method, Rippel and Teply (2011) presented a methodology for combining internal losses with the scenario analysis that used the worst case of loss de ned for one scenario in particular and the average loss given by a probability of loss distribution de ned for a scenario In both approaches, the values of the scenarios were added to the records on historical losses to determine the frequency and severity distribution parameters. The scenario analysis element was used as a direct input; that is, the scenario values were used together with the internal data for frequency and severity modeling For the authors, this type of methodology for de ning scenarios is much better understood by managers and adds the bene t of expert opinion to the capital measurement. Some assumptions were extracted from the studies chosen, such as: (i) the use of distributions with understood parameters, such as the Poisson distribution and triangular distribution (Folpmers, 2008); (ii) the use of information such as direct input in the LDA methodology (Aue & Kalkbrener, 2007; Momen et al, 2012)
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