Shapley Allocation, Diversification and Services in Operational Risk

Peter Mitic () and Bertrand K. Hassani ()
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Peter Mitic: Santander UK
Bertrand K. Hassani: Grupo Santander et Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: A method of allocating Operational Risk regulatory capital using the Shapley method for a large number of business units, supported by a service, is proposed. A closed-form formula for Shapley allocations is developed under two principal assumptions. First, if business units form coalitions, the value added to the coalition by a new entrant depends on a constant proportionality factor. This factor represents the diversification that can be achieved by combining operational risk losses. Second, that the service should reduce the capital payable by business units, and that this reduction is calculated as an integral part of the allocation process. We ensure that allocations of capital charges are acceptable to and are understandable by both risk and senior managers. The results derived are applied to recent loss data

Keywords: Allocation; Shapley; operational risk; diversification; service; Game theory; capital value (search for similar items in EconPapers)
JEL-codes: C46 C63 C71 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-06
New Economics Papers: this item is included in nep-gth and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:15056

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