Operational Risk has become a key area of priority for the banks in the recent past due to regulatory pressures. The banks are identifying ways of measuring, monitoring, and predicting losses due to operational risks in the system and the associated capital requirements.
Operational losses are typically low frequency high value events, which mean the distribution of severity has a scarcely populated long tail region. However, modeling tails effectively (required to assess capital requirements accurately) puts ominous demand on the amount of data required, which is a serious challenge in case of operational loss event data. This paper aims to provide an operational risk and capital measurement framework for banks.