BASEL II: PROBLEMS AND USAGE

5.3. Regulatory Capital Requirements
for Operational Risk
At the beginning of 2008, 98 percent of the banks in Germany determined
the operational risk capital requirements according to the BIA. Only
17 banks committed themselves to the more advanced SA and even a smaller
number of banks received the permission to apply the most challenging
AMA.
At the beginning of 2009, already 70 banks applied the SA, accounting
for more than three percent of the German banks. The situation with the
AMA did not change; still only ten banks calculate their operational risk
capital requirements according to this method. Among the banks applying
the AMA, six belong to the commercial banks group and one to the specialized
banks. The savings banks sector is represented by two banks whereas
the cooperative banks sector by only one bank. The AMA banks account
for 46 percent of the balance sheet total of all banks, the SA banks for
24 percent and the banks applying the BIA cover 30 percent of the balance
sheet total. Although the Solvency Regulation permits the application of
the AMA to a part of the bank, most of the banks implementing the AMA
do not take advantage of the partial use opportunity.
Thus, the AMA is not widespread in Germany, being used by less than
one percent of the banks. This can be explained by several difficulties connected
with measuring operational risk. One problem is data scarcity. Operational
risk loss events occur very seldom within one particular bank.
Consequently, the banks’ internal data on operational losses contain only
a few observations. The Solvency Regulation allows banks to supplement
their internal data with external data sources and scenario analysis. External
data, obtained from other banks, may, however, not be comparable to a bank’s
own loss potential. Therefore, banks must decide how relevant another bank’s
loss is to its own internal operations.
The most commonly used advanced approach to measure operational
risk is the Loss Distribution Approach (LDA), which consists of three basic
components. At first, a loss frequency distribution has to be estimated, in
order to model the number of losses that may take place within a given period.
The frequency of losses is described by a discrete distribution. The
second step requires an estimation of a loss severity distribution for modeling
a money amount of individual losses that occur within some certain
time period. Loss severity is described by a continuous distribution. Currently,
there is no consensus regarding the shape of the loss severity distribution.
Finally, one has to combine the loss severity and the loss frequency
distribution in order to obtain an aggregate loss distribution. All German
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