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Abstract
This paper conducts an empirical analysis with regard to those methodologies proposed by the Basle Committee for the estimation of the operational capital charge. More specifically, we compare an advanced measurement approach, as the Loss Distribution Approach (LDA), versus the so called non-advanced ones, that is, the Basic Indicator Approach (BIA) and the Standardised Approach (SA). As the former establishes a direct relationship between capital consumption and bank's gross accounting income, the actuarial model (LDA) depends on the historical operational losses to which the concept of Value at Risk (VaR) is applied. Based on the data provided by a Spanish Saving Bank which operates within the retail banking, our results confirm that the implementation of such advanced approach gives raise to a lower consumption of regulatory capital, in comparison to the BIA and SA. By focussing on the LDA model, we also highlight the supremacy of the severity on the frequency distribution when calculating the Capital at Risk (CaR). Due that the parametric profile of the severity is strongly conditioned by those losses located in the tail of such distribution, the higher degree of asymmetry and kurtosis observed, the higher capital charge in consequence.
Key Words: Operational risk; Regulatory capital; Advanced measurement approach; Basic indicator approach; Standardised approach
JEL Classification: C15, C16, G28, G32
Introduction
In June 2006, the Basel Committee on Banking Supervision, henceforth the Committee, published the last version of the New Capital Accord (Basel II)1. One of the principal novelties of Basel II is the inclusion of capital charge against operational risk, added to those traditional requirements to cover both credit and market risk. Three main methodologies are proposed by the Committee for calculating the operational risk regulatory capital:
Basic Indicator Approach (BIA)
Standardised Approach (SA)
Advanced Measurement. Approach (AMA)
More specifically, within the AMA models, the Loss Distribution Approach (LDA) is proved to be the most sensitive methodology to measure such a risk. Starting from this premise, the main hypothesis of our paper is to calibrate, by conducting an empirical application, whether the implementation of an advanced approach in financial entities provides a lower consumption of the regulatory capital, in comparison with the non-advanced ones. As previous studies on the LDA model reveal the high impact of the...