Dear David:
On your webinar 「2010-7-a-Operational」 page 11:
Explain how capital is attributed to market, credit, & operational risk.
Capital for Market Risk
–In RAROC, market risk capital is attributed as a function of the risk expressed in the VAR calculation.
Charge MR= (F1*VaR)+(F2*Unused portion of limit)+(F3*excess)
I tried to compare it with BASEL Market Risk Charge (Internal Model Approach, 2010-7--Ops-(L2), page 68 )
Charge MR=MAX ( VaRt-1, F*1/60 ∑_(t-1)^60▒〖VaRt-i〗) + Specific Risk
Obviously, there are some differences between these two ways to calculate market risk capital charge. Any comment? Or it is simply one for RAROC Market Risk Charge, the other for Basel Market Risk Charge?
Besides, RAROC credit risk charge seems similar with Basel credit risk charge.
As you mentioned in 「2010-7-a-Operational」 page 11:
RAROC credit risk charge is a function of exposure, probability of default (usually a function of risk rating (RR) or via algorithm), and recovery rates. The capital factors (i.e., applied as a percentage of face value) vary based on RR and tenor.
in 「2010-7-a-Operational」 page 16:
Capital factor=1.89%
For Basel credit risk charge
In 「2010-7-d-Operational」 page 17:
RWA IRB approach = 12.5*EAD*K
K= LGD*f(PD)*f(M,b)
The K is the same as Capital factor (=1.89%)?
Finally, operational risk measurement is a "work in progress" for RAROC. Why?
Why not use the methods for Basel Operational Risk Charge, like LDA (Loss Distribution Approach), ScoreCard Approach?
Many Thanks!
On your webinar 「2010-7-a-Operational」 page 11:
Explain how capital is attributed to market, credit, & operational risk.
Capital for Market Risk
–In RAROC, market risk capital is attributed as a function of the risk expressed in the VAR calculation.
Charge MR= (F1*VaR)+(F2*Unused portion of limit)+(F3*excess)
I tried to compare it with BASEL Market Risk Charge (Internal Model Approach, 2010-7--Ops-(L2), page 68 )
Charge MR=MAX ( VaRt-1, F*1/60 ∑_(t-1)^60▒〖VaRt-i〗) + Specific Risk
Obviously, there are some differences between these two ways to calculate market risk capital charge. Any comment? Or it is simply one for RAROC Market Risk Charge, the other for Basel Market Risk Charge?
Besides, RAROC credit risk charge seems similar with Basel credit risk charge.
As you mentioned in 「2010-7-a-Operational」 page 11:
RAROC credit risk charge is a function of exposure, probability of default (usually a function of risk rating (RR) or via algorithm), and recovery rates. The capital factors (i.e., applied as a percentage of face value) vary based on RR and tenor.
in 「2010-7-a-Operational」 page 16:
Capital factor=1.89%
For Basel credit risk charge
In 「2010-7-d-Operational」 page 17:
RWA IRB approach = 12.5*EAD*K
K= LGD*f(PD)*f(M,b)
The K is the same as Capital factor (=1.89%)?
Finally, operational risk measurement is a "work in progress" for RAROC. Why?
Why not use the methods for Basel Operational Risk Charge, like LDA (Loss Distribution Approach), ScoreCard Approach?
Many Thanks!