LDA at work: Deutsche Bank's approach to quantifying operational risk

Abstract

The Advanced Measurement Approach in the Basel II Accord permits an unprecedented amount of flexibility in the methodology used to assess operational risk capital requirements. In this paper we present the capital model developed at Deutsche Bank and implemented in its official economic capital process. The model follows the Loss Distribution Approach (LDA). Our presentation focuses on the main quantitative components, ie, use of loss data and scenarios, frequency and severity modeling, dependence concepts, risk mitigation and capital calculation and allocation. We conclude with a section on the analysis and validation of LDA models.

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