A PIECEWISE-DEFINED SEVERITY DISTRIBUTION-BASED LOSS DISTRIBUTION APPROACH TO ESTIMATE OPERATIONAL RISK: EVIDENCE FROM CHINESE NATIONAL COMMERCIAL BANKS

Following the Basel II Accord, with the increased focus on operational risk as an aspect distinct from credit and market risk, quantification of operational risk has been a major challenge for banks. This paper analyzes implications of the advanced measurement approach to estimate the operational risk. When modeling the severity of losses in a realistic manner, our preliminary tests indicate that classic distributions are unable to fit the...