Loss distribution approach for modelling of operational risk

Importance of operational risk in calculation of capital necessity has increased in recent years. Using advanced measurement approaches in modeling operational risk provide us with more sensitive calculations in comparison to other approaches. In this study we emphasized on use of loss distribution approach, which is one approach of the advanced measurement approaches, in modeling operational risk. Relaying on actuary basis, loss distribution approach estimates probability distribution of operational risks with help of historical data.In the first chapter of this study, description of operational risk and its modeling was explained. In the second chapter, loss distribution approach was examined in the terms of actuary and was explained how to use this approach in calculations of capital requirements. In the application part of this study, for operational risks, aggragate loss distribution has been established through simulation method by using the specific parameters of a bank, and capital requirements have been calculated with different approaches. Value at risk of aggregate loss distribution, which belongs to operational risk cases, was calculated and interpreted by considering their distribution characteristics. It was observed that, fat tail distributions maximize amount of capital at risk.Key Words: Operational Risk, Loss Distribution Approach, Aggregate Loss Distribution, Value at Risk.