Scenario Analysis for Modelling Operational Losses in the Absence of Data : The Spanish Bank in Perspective*

The transposition of the European Directive on Basel II has been recently done by the Circular 3/2008 on Minimum Capital Requirements of the Bank of Spain. This new regulatory framework has encouraged the Spanish banking sector to evolve to sophisticated techniques for managing operational risk more effectively. According to the Committee, the Loss Distribution Approach (LDA) seems to be the most suitable methodology for estimating the Capital at Risk (CaR). In this paper, we conduct a Scenario Analysis combined with the LDA to calculate the capital charge for operational risk, and more specifically, for the Internal Fraud event type. The Scenario Analysis is an essential technique when lacking of data in order to complete the Internal Operational Loss Database (IOLD). We apply this analysis in the case of the IOLD provided by a Spanish saving bank. Since there is only one observation recorded due to the Internal Fraud and, being aware of the under-reporting phenomenon, we design two hypothetical scenarios to offset the missing data. Furthermore, we also develop a stress-testing to calibrate the potential impact on CaR due to mechanical changes in both scale and shape parameters of the severity distribution. As a result, we find a positive relationship between the degree of asymmetry and kurtosis that characterized the loss distribution and the capital consumption.