Forward-Looking and Incentive-Compatible Operational Risk Capital Framework

37 Pages Posted: 10 May 2017

Multiple version iconThere are 4 versions of this paper

Date Written: May 8, 2017

Abstract

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

Migueis, Marco, Forward-Looking and Incentive-Compatible Operational Risk Capital Framework (May 8, 2017). Available at SSRN: https://ssrn.com/abstract=2964945 or http://dx.doi.org/10.2139/ssrn.2964945

Marco Migueis (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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