Finance and Economics Discussion Series (FEDS)

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May 2019

Benchmarking Operational Risk Stress Testing Models

Filippo Curti, Marco Migueis, and Robert Stewart

Abstract:

The Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) requires large bank holding companies (BHCs) to project losses under stress scenarios. In this paper, we propose multiple benchmarks for operational loss projections and document the industry distribution relative to these benchmarks. The proposed benchmarks link BHCs' loss projections with both financial characteristics and metrics of historical loss experience. These benchmarks capture different measures of exposure and together provide a comprehensive view of the reasonability of model outcomes. Furthermore, we employ several approaches to assess the conservatism of BHCs' stress loss projections and our estimates for the conservatism of loss projections for the median bank range from the 90th percentile to above the 99th percentile of the operational loss distribution.

Accessible version (.zip)

Keywords: Benchmarking, Operational Risk, Stress testing

DOI: https://doi.org/10.17016/FEDS.2019.038

PDF: Full Paper

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Last Update: January 09, 2020