To quantify an operational risk capital charge under Basel II, many banks adopt a loss distribution approach. Under this approach, quantification of the frequency and severity distributions of operational risk involves the bank’s internal data, expert opinion and relevant external data. In this paper we suggest a new approach, based on a Bayesian inference method, that allows for a combination of these three sources of information to estimate the parameters of the risk frequency and severity distributions.
- operational risk
- Basel II
- Loss Distribution Approach
- Bayesian inference
- Advanced Measurement Approach
- Quantitative Risk Management
- generalized inverse Gaussian distribution