On the Optimal Design of Operational Risk Data Consortiums

24 Pages Posted: 9 Jun 2016

See all articles by Hubert Janos Kiss

Hubert Janos Kiss

Eötvös Loránd University; Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS)

Daniel Homolya

Erste Bank Hungary Zrt.

Date Written: March 30, 2014

Abstract

To manage operational risk, banks increasingly use data from consortiums formed by peer institutions. Although existing data consortiums seem to work appropriately, it is worth examining why banks report properly (that is, thoroughly and truthfully), since in several countries where new data consortiums are planned, there are fears that banks may choose to report untruthfully or hide information (what we call misreporting). We show that if misreporting cannot be detected, then, even in an infinitely repeated setup, the game has multiple equilibriums, so proper reporting is not the unique outcome. We then analyze two types of sanctions.When the punishment is nonmonetary (eg, exclusion from the consortium for a given number of periods), then for some parameter values even the harshest punishment cannot bring about proper reporting as the unique outcome. Nonetheless, a numerical example suggests that by designing the data consortium adequately, proper reporting can be advanced, without overly compromising anonymity.When a monetary fine is imposed on misreporting banks, a sufficiently severe punishment results in proper reporting, even if anonymity is maintained in the limit.

Keywords: Data Consortiums, Operational Risk Management

Suggested Citation

Kiss, Hubert Janos and Homolya, Daniel, On the Optimal Design of Operational Risk Data Consortiums (March 30, 2014). Journal of Operational Risk, Vol. 9, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2791587

Hubert Janos Kiss (Contact Author)

Eötvös Loránd University ( email )

Pazmany Peter setany 1A
Budapest, -- H1117
Hungary

Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS) ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

Daniel Homolya

Erste Bank Hungary Zrt. ( email )

24–26 Nepfurdo Street
Budapest, 1138
Hungary

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
125
PlumX Metrics