The problems with conduct risk loss aggregation
Aggregating conduct risk losses is recommended practice, but risk modellers should be careful – it may seriously distort their capital calculations
Peter Mitic is the UK head of operational risk methodology at Santander
When a large number of very small losses, such as conduct risk loss events, are aggregated into a small number of very large losses, modelling regulatory capital becomes difficult. Capital models attempt to assign a severity distribution and the frequency distribution to empirical data. In practice, the traditional severity distributions have been “fat-tailed”. These distributions are useful for modelling a small number of
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