The new requirements of the Basel Comittee on Banking Supervision -Basel II- force banks to incorporate operational risk into their risk management. Therefore operational risk became a popular and booming part of a bank's risk management. A few years ago only market risk and credit risk were seen as the main risk drivers, but nowadays, not only due to the new Basel Capital Accord, an increasing awareness of operational risks as substantial part of a bank's risk management appeals.
Additionally, Basel II requirements expect from an internationally acitive bank to use an Advanced Measurement Approach - AMA, the most sophisticated approach for modelling operational risks. This requires new analysis toward data consistency and completeness. The Basel II standards do not restrict the wide range of possibilities to model operational risk. Many different approaches and models, for implementing an AMA, have been developed recently. The model introduced in this work will be based on the Loss Distribution Approach - LDA, which on its part will be mainly driven by scenarios.
Scenarios as addendum to internal or external data sources are not backward-looking and provide a more risk sensitive way of managing and measuring operational risk. Scenarios will be generated by using various data sources, such as internal and/or external data and key risk indicators - KRIs.
The link between LDA and scenarios will be the following: Scenario analysis will be used to generate parameters for the loss severity distribution, which is one part of the compound loss distribution (the other part is the loss frequency distribution).