Scenario Analysis In The Measurement Of Operational Risk Capital: A Change Of Measure Approach

Operational risk is now increasingly being considered an important financial risk and has been gaining importance similar to market and credit risk. In particular, in the banking regulation for large financial institutions it is required that operational risk be separately measured. The capital being held to safeguard against such risk is very significant at a large financial institution. While scenario analysis is an important tool for financial risk measurement, its use in the measurement of operational risk capital has been quite arbitrary and often inaccurate. The importance of scenario analysis cannot be overstated.