Measurement of operational risk regulatory capital in the banking sector: Developed countries versus emerging markets

Author's Department

Economics Department

Second Author's Department

Economics Department

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Document Type

Research Article

Publication Title

Journal of Operational Risk

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This paper addresses operational risk as a fundamental risk type faced by banks in emerging and developed economies. We explore several models to specify the marginal and joint distributions of the types of operational losses that reflect loss frequencies and severity distribution(s), using international data published by a group of banks from developed and emerging economies. Our results reveal that a uniform approach to model operational risk in both types of economy may lead to the overestimation or underestimation of capital losses in banks. This could result in opportunity costs of holding excessive capital to mitigate operational losses, or in extra costs resulting from an underestimation of the capital required.

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