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Banking Capital and Operational Risks: Comparative analysis of regulatory approaches for a bank

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Abstract

The nature of operational risk means that although it constitutes a small part of a bank’s risk profile, it includes unexpected events that could potentially cause the collapse of the entire bank. To understand the relationship between economic and regulatory operational risk capital we first examine selected large internationally active banks’ capital disclosures and review the Basel II approaches to allocation of regulatory capital for operational risk. The extreme risk capital model (ERCM) proposed earlier is applied to calculate the operational risk capital of a specific bank using its internal operational loss data over a four-year period and the results are compared to the proposed alternatives. This comparison supports the argument that the extreme risk capital allocation model view point provides an integrated and holistic view of a bank’s operational risk exposure which is especially suitable for risk management at the strategic level.

Suggested Citation

  • Medova, Elena A & Ber-Yuen, Pia E.K., 2009. "Banking Capital and Operational Risks: Comparative analysis of regulatory approaches for a bank," Journal of Financial Transformation, Capco Institute, vol. 26, pages 85-96.
    • Handle: RePEc:ris:jofitr:0936
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    More about this item

    Keywords

    Risk integration; operational risk; regulatory capital; economic capital; basic indicator approach; loss distribution approach; extreme risk capital;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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