A review of the key issues in operational risk capital modeling

ABSTRACT In an effort to bolster soundness standards in banking, the 2006 international regulatory agreement of Basel II requires globally active banks to include operational risk in estimating the regulatory and economic capital to be held against major types of risk. This paper discusses practical issues faced by a bank in designing and implementing an operational risk capital model. Focusing on the use of the loss distribution approach in the context of the Basel advanced measurement approach, pertinent topics for future research are suggested.