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: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Santander UK

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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)
Date: 2015-06
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01179042v1
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Published in 2015

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01179042

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