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

Elena A Medova () and Pia E.K. Ber-Yuen ()
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Elena A Medova: Centre for Financial Research, Cambridge University & Cambridge Systems Associates, Postal: Centre for Financial Research, Statistical Laboratory, Wilberforce Road, Cambridge CB3 0WB, CB2 1AG, http://www.cfr.statslab.cam.ac.uk
Pia E.K. Ber-Yuen: Cambrideg Systems Associates Limited, Postal: 5-7 Portugal Place, Cambridge, CB5 8AF, http://www.cambridge-systems.com

Journal of Financial Transformation, 2009, vol. 26, 85-96

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.

Keywords: Risk integration; operational risk; regulatory capital; economic capital; basic indicator approach; loss distribution approach; extreme risk capital (search for similar items in EconPapers)
JEL-codes: G28 G32 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:0936

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