The optimal operational risk capital requirement by applying the advanced measurement approach

Abstract

The purpose of this paper is to construct a risk quantification model to achieve the accurate operational risk management and gain the satisfying estimation and control of future possible extreme losses by using capital charges to assess operational risk. The paper takes a case bank as the research object and compares the differences under various circumstances engaging the Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach for the operational risk capital requirement of a bank. The results indicate that it is more appropriate to adopt the Advanced Measurement Approach to estimate the operational risk capital requirement; this way can help a bank enjoy a much lessened capital charge required and subsequently its available capital increases. Hence, it allows a bank to have sufficient funds in operations and reduce the burden of capital costs. Therefore, it will bring the positive benefits to the whole banking industry when enforcing the Advanced Measurement Approach.