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Diversification effects in operational risk: A robust approach
Journal of Risk Management in Financial Institutions,
3
(3),
243-258
(2010)
Abstract
Both the Basel II regulation for banks and the planned Solvency II directive for insurance companies allow institutions to reduce the operational risk capital in their internal model when they can demonstrate the existence of diversification effects. This paper shows how an institution can directly derive the dependency structure between operational risk cells from internal loss data in a realistic setting. Furthermore, it is demonstrated how the institution can, in a statistically sound manner, prove that the effect of diversification on the capital charge is taken into account in a conservative way. The presented approach should therefore allow an institution to reduce its overall operational risk capital due to diversification effects. As all parameters are derived from data already known to companies, using an operational risk model based on internal loss data (loss distribution approach), the concurrent implementation effort is relatively small. The derivation of correlation parameters is demonstrated using internal loss data from UniCredit Group. The resulting effect on the overall capital at risk is shown on the basis of a simplified loss distribution approach.
Keywords: operational risk; loss distribution approach; Basel II; Solvency II; correlation; copula; diversification effect; value at risk
The full article is available to subscribers to the journal.
Author's Biography
Fabio Monti is a senior quantitative analyst in operational risk management at UniCredit Group in Milan. He joined the group’s operational risk management team in 2007, working mainly on the development of the Advanced Measurement Approaches model. A graduate in physics, before joining UniCredit he worked as a research assistant at the University of Milan’s General and Applied Physics Institute. He is the author of several articles on physics.
Michael Brunner is a member of the team responsible for developing and maintaining UniCredit Group’s operational risk capital model. This includes capital calculation, regulatory and economic capital allocation, and regulatory notification. Prior to joining the holding company of UniCredit Group one year ago, Michael worked as an IT consultant at HVB IS, where he was responsible for implementation and maintenance of the central operational risk management tool. Michael has a PhD in physics and a degree in business economics. He is the author of several articles.
Fabio Piacenza is a senior quantitative analyst in operational risk management at UniCredit Group in Milan. He has been working in operational risk management for the firm since 2002. He contributed to the development of the firm’s advanced measurement approach (AMA) model by helping to build the statistical methodology and implement the codes for calculating the AMA capital requirement. A graduate in mathematics, he has written a number of articles and one book on topics related to operational risk.
Davide Bazzarello is Group Head of Operational Risk at UniCredit Group. He joined the group’s risk management area in 2000, subsequently moving to market risk control for Central and East European countries. In 2003 he helped to set up the firm’s operational risk function, running the research and development team until the advanced measurement approach application went live. Davide has written a number of papers on operational risk modelling and insurance.
Citation
Monti, Fabio, Brunner, Michael, Piacenza, Fabio and Bazzarello, Davide (2010, June 1). Diversification effects in operational risk: A robust approach. In the Journal of Risk Management in Financial Institutions, Volume 3, Issue 3. https://doi.org/10.69554/BYCF1387.
© Henry Stewart
Publications LLP
Publications LLP