A Review of Correction Techniques for Inherent Biases in External Operational Risk Loss Data
Banks wishing to implement the Advanced Measurement Approach (AMA) to calculate their Operational Risk Regulatory Capital (ORRC), must incorporate either implicitly or explicitly, internal and external loss data (ILD and ELD), scenario analysis (SA) and business environment and internal control factors (BEICFs) into their operational risk measurement system. Through the collection of ILD, banks are able to ascertain information on commonly occurring low impact operational risk losses. However, to complete their loss profile, both ELD and SA are used to supplement the bank?s internal loss experience with the infrequent yet potentially severe operational risk loss events not usually experienced in a banks loss history. The main limitation of utilising ELD for such a purpose is the inherent biases apparent in the data. This paper explores the reporting, control and scale bias that are inherent in ELD and the subsequent problems faced when incorporating external data into the AMA.
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