Capital Ratio Information SMFG (2) Measurement Using the Quantification Model When calculating operational risk using the quantification model, firstly, we input seven-year historical internal loss data (realized  risks) and the data on the frequency of “low-frequency and high-severity” events (potential risks) in terms of four loss amounts, which  have been estimated through risk control assessments, and generate a loss distribution. Secondly, we use this distribution to estimate  the maximum loss amount with a 99.0 percentile confidence interval (hereinafter referred to as 99.0% VaR). Thirdly, we multiply this  maximum loss by a number, which we call “the risk capital conversion factor,” to estimate 99.9% VaR. Finally, we calculate required  capital by using a multiplier that has been determined based on the number of times in which actual losses have exceeded predicted  losses through the use of back testing. In estimation of the aggregated loss distribution, we need to estimate the loss severity and  frequency distribution. In addition, we confirm whether the quantification model is functioning appropriately and conservatively in measuring operational  risk by implementing various types of sensitivity analysis and verification tests. The following chart puts the main points of this quantification method in order and explains how the results of measurement are  verified. 0.4 0.3 0.2 0.1 0 99.0 99.9 A. Measurement Using the Quantification Model (D) Calculation of Required Capital Aggregated Loss Distribution Frequency Severity B. Verification of the Quantification Model (A) Verification of Quantification Accuracy (B) Implementation of Regular Verification Process (Pre-testing, Back testing) (B) Estimation of Loss Frequency  Distribution Reiteration Probability of occurrence (frequency) Amount of annual loss Times the risk capital conversion factor  Total Sampling of the number of losses from the distribution Calculation of annual loss amount Sampling of the amount of losses of the cases drawn from the distribution (A) Estimation of Loss Severity  Distribution (C) SMFG  2011 205