Download this Paper Open PDF in Browser

Risk Shifting and Regulatory Arbitrage: Evidence from Operational Risk

50 Pages Posted: 26 Jun 2017  

Brian J. Clark

Rensselaer Polytechnic Institute (RPI); Office of the Comptroller of the Currency

Alireza Ebrahim

Office of the Comptroller of the Currency (OCC)

Date Written: June 23, 2017

Abstract

Regulations leading up to the financial crisis of 2007-2009 provided incentives for banks shift their risk profiles toward less regulated areas. We focus on the case of operational risk which went from being a relatively benign and largely unregulated risk type to a major risk that now accounts for about 25% of large banks' risk profile. We show that capital-constrained banks aggressively took on operational risk as a mean of regulatory arbitrage. Indeed, this contributed to operational risk's rise to prominence as a leading risk type in the financial sector and worsened the effects of the crisis.

Keywords: Operational Risk, Risk Shifting, Regulatory Arbitrage, Bank Regulatory Capital

JEL Classification: G00, G11, G18, G21, G28

Suggested Citation

Clark, Brian J. and Ebrahim, Alireza, Risk Shifting and Regulatory Arbitrage: Evidence from Operational Risk (June 23, 2017). Available at SSRN: https://ssrn.com/abstract=2991789

Brian Clark

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States
202-215-6500 (Phone)

Alireza Ebrahim (Contact Author)

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Paper statistics

Downloads
51
Rank
335,356
Abstract Views
317