A Test of the Strategic Effect of Basel II Operational Risk Requirements on Banks

Carolyn Currie

No 141, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: Most problematic of the Basel II capital adequacy requirements is the subset of Pillar I, requiring provision for operational risk (OR) as distinct from credit and market risk. Previous tests of the strategic effect of this new regulation from three prior Quality Impact Studies (QIS) conducted in G10 countries under the guidance of the Bank for International Settlements, have concluded that OR requirements poses difficulties of definition, implementation, and strategic planning. Anticipated strategic effects include dramatic changes to product development, investment and asset mix, as well as the necessity to rapidly develop new risk rating models and techniques, together with vastly expanded internal and external audit compliance routines. Unlike QIS1, 2 and 3, QIS4 focuses on operational risk, but still has drawbacks. This paper discusses its approach, in view of the ongoing difficulties that banks are experiencing with operational risk, particularly in the construction of a database. It concludes by listing the unanswered questions that have not even been addressed in four studies of the strategic impact of Basel II?s OR requirements. It also suggests that many smaller banks and emerging nations may not be able to use the sophisticated approaches and hence will suffer a competitive disadvantage. Hence in view of drawbacks in the simpler approaches such as lack of correlation of operational risk and revenue, other indicators such as the standard deviation of efficiency measures are suggested.

Keywords: operational risk; Basel II (search for similar items in EconPapers)
JEL-codes: E42 E44 E58 (search for similar items in EconPapers)
Date: 2005-05-01
New Economics Papers: this item is included in nep-fin, nep-mac, nep-reg and nep-rmg
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Citations: View citations in EconPapers (6)

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Journal Article: A TEST OF THE STRATEGIC EFFECT OF BASEL II OPERATIONAL RISK REQUIREMENTS ON BANKS (2006)
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