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Data Limitations

  • The historical operational risk loss data is currently inadequate to run these simulations
  • Banks should use internal data to estimate the frequency of losses
  • Banks should use both internal and external data to estimate the severity of losses
  • There are two sources of external data:
    • Data sharing agreement with other banks
    • Public Data

Scenario Analysis in Scarce Data

  • In scenario analysis, different scenarios are created to incorporate the events that have not
  • yet occurred
  • Regulators have encouraged the use of scenario analysis
  • Scenario analysis act as a tool for the management to immunize against potential operational risk
  • The drawback of scenario analysis is the excessive amount of time spent by the management to create such scenarios

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