Maximum-Entropy-Based Operational Risk Loss Distribution Estimation of Commercial Banks

Operational risk management is an important issue of commercial banks in recent years, although there are lots of papers in this issue, the study is still on the initial stage. Lack of banks' risk loss data is the biggest problem and has brought great challenge to the quantification of operational risk. On the basis of analyzing the study of operational risk advanced approach home and abroad, this paper has introduced maximum entropy method, which is a important progress of the quantitative theory on the uncertainty and is widely used in fields of science, to the quantification of operational risk. By using 222 bank loss events, we empirically derived operational risk loss distribution functions for China's banking industry, these functions can provide references for commercial banks on calculating economic capital.