Towards a practical capital model

Existing models for calculating and allocating capital for operational risk fail to achieve their goals. Richard Pike proposes a mixture of such approaches to attain a practical capital framework

REGULATORS and senior management are placing increasing emphasis on the need to calculate and allocate capital for operational risk. Among the internal measurement and allocation systems the industry has defined, three methodologies are being used and are evolving throughout the world:

• Loss distribution. This is where the capital charge is based on a (high) percentile of the probability distribution of operational losses from both internal and external sources.

• Scenario approach. Here, high