(Operational Risk) Loss Severity Distribution and Macroeconomic Scenario

pabdndiaye
Posts: 1
Joined: Fri Aug 07, 2015 7:25 am

(Operational Risk) Loss Severity Distribution and Macroeconomic Scenario

Postby pabdndiaye » Fri Sep 18, 2015 3:25 pm

Hi can you help me understand how banks tie Loss Severity distributions to macroeconomic scenarios? Off the top of my head this can be accomplished in two different manners. A) a move along the loss severity curve and B) a shifting of the loss severity curve. Are there any universally accepted approaches to this as used for stress testing purposes?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: (Operational Risk) Loss Severity Distribution and Macroeconomic Scenario

Postby edupristine » Mon Sep 28, 2015 5:51 am

Under the Loss Distribution Approach, the bank estimates, for each business line/risk type cell, the probability distribution functions of the single event impact and the event frequency for the next (one) year using its internal data, and computes the probability distribution function of the cumulative operational loss.

In LDA, the modelling of the aggregate loss distribution is done in two steps. We first consider a loss severity distribution and a loss frequency distribution. Then, we obtain the aggregate loss distribution by compounding them.


Return to “Operational Risk”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.