Measuring the capital charge for operational risk of a bank with the large deviation approach

Abstract

In this paper, the large deviation approach for computing the capital charge for operational risk of a bank is explored. Firstly, the negatively-associated structure is utilized to measure the dependence between distinct operational loss cells. Secondly, the lower and upper bounds of the tail distribution function of total aggregated loss processes are determined. In addition, first order approximations using a value-at-risk measure are derived. Finally, an important example calculating the capital charge for operational risk under the class of a heavy-tailed distribution is provided.