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Rethinking Operational Risk Capital Requirements

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  • Peter Sands
  • Gordon Liao
  • Yueran Ma

Abstract

Operational risk capital requirements represent a relative backwater of the Basel capital framework for banks. We examine both the existing Basel 2 framework and the latest Basel Committee proposals for reform and conclude that neither are effective in creating appropriate incentives and loss absorbency to minimize negative externalities from operational risk events. We evaluate an alternative approach that would appear to be much more effective in achieving regulatory objectives. We do not offer a view on the amount of capital required, focusing instead on the methodology and structure of the capital requirement.

Suggested Citation

  • Peter Sands & Gordon Liao & Yueran Ma, 2018. "Rethinking Operational Risk Capital Requirements," Journal of Financial Regulation, Oxford University Press, vol. 4(1), pages 1-34.
    • Handle: RePEc:oup:refreg:v:4:y:2018:i:1:p:1-34.
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    File URL: http://hdl.handle.net/10.1093/jfr/fjx009
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    1. Akimoto, Keigo & Sano, Fuminori & Oda, Junichiro, 2022. "Impacts of ride and car-sharing associated with fully autonomous cars on global energy consumptions and carbon dioxide emissions," Technological Forecasting and Social Change, Elsevier, vol. 174(C).

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