Munich Personal RePEc Archive

An application of capital allocation principles to operational risk

Urbina, Jilber and Guillén, Montserrat (2013): An application of capital allocation principles to operational risk. Published in: Expert Systems with Applications , Vol. 41, No. 16 (15 November 2014): pp. 7023-7031.

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Abstract

The cost of operational risk refers to the capital needed to afford the loss generated by ordinary activities of a firm. In this work we demonstrate how allocation principles can be used to the subdivision of the aggregate capital so that the firm can distribute this cost across its various constituents that generate operational risk. Several capital allocation principles are revised. Proportional allocation allows to calculate a relative risk premium to be charged to each unit. An example of fraud risk in the banking sector is presented and some correlation scenarios between business lines are compared.

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