A knowledge based approach to loss severity assessment in financial institutions using Bayesian networks and loss determinants

作者：Hager David^*; Andersen Lasse B

来源：European Journal of Operational Research, 2010, 207(3): 1635-1644.

DOI：10.1016/j.ejor.2010.06.020

• Risk management
• OR in financial institutions
• Bayesian networks
• Loss determinants
• Advanced measurement approach

Modelling loss severity from rare operational risk events with potentially catastrophic consequences has proved a difficult task for practitioners in the finance industry. Efforts to develop loss severity models that comply with the BASEL II Capital Accord have resulted in two principal model directions where one is based on scenario generated data and the other on scaling of pooled external data. However, lack of relevant historical data and difficulties in constructing relevant scenarios frequently raise questions regarding the credibility of the resulting loss predictions. In this paper we suggest a knowledge based approach for establishing severity distributions based on loss determinants and their causal influence. Loss determinants are key elements affecting the actual size of potential losses, e.g. market volarility, exposure and equity capital. The loss severity distribution is conditional on the state of the identified loss determinants, thus linking loss severity to underlying causal drivers. We suggest Bayesian Networks as a powerful framework for quantitative analysis of the causal mechanisms determining loss severity. Leaning on available data and expert knowledge, the approach presented in this paper provides improved credibility of the loss predictions without being dependent on extensive data volumes.

• 出版日期2010-12-16