Forward-Looking and Incentive-Compatible Operational Risk Capital Framework
37 Pages Posted: 10 May 2017
Date Written: May 8, 2017
The Advanced Measurement Approach (AMA) to operational risk capital is vulnerable to gaming, complex, and lacks comparability. The Standardized Measurement Approach (SMA) to operational risk capital lacks risk sensitivity and is unlikely to be appropriately conservative for US banks. An alternative framework is proposed that addresses the weaknesses of these approaches by relying on an incentive‐compatible mechanism to elicit forward‐looking projections of loss exposure.
Keywords: Banking Regulation, Operational Risk, Regulatory Capital, Incentive Compatibility
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation