- The basic indicator (operational risk capital is based on 15% of the bank's annual gross income over a 3 year period)

- Standardized approach (bank uses 8 busienss lines with different beta factors to calculate OR capital charge. With this approach the beta of each capital line is multipled by the annual gross income amount over a 3 year period.

- Advanced measurement approach - banks need to determine OR capital charge based on internal criteria that are both qualitative and quantative in nature.

In order to use the standardized OR approach banks must: (5 things)

In order to use AMA banks must:

- have an OR management function that is able to identify, assess, monitor and control this type of risk

- document losses for each business line

- report OR losses on a regular basis

- have a system that has the appropriate amount of documentation

- conduct independent audits with both internal and external audits

---- fufil all of the above and be able to approximate unexpected losses.

- clients, products and business practices

- internal fraud

- external fraud

- damage to physical assets

- execution, delivery and process management

- business disruption and system failure

- employment practices and workplace safety

loss frequency (often modelled with a poisson distribution)

loss severity (often modelled with a lognormal distribution)

Bank Z observed loss = 5 million.

Bank Z has 1 billion in revenue.

Bank Y has has 2 billion in revenue.

Whats the estimated loss adjusted for firm size Y?

= 5 mil * (2 bil / 1 bil)^.23

= 5.846 million.