Forward-Looking and Incentive-Compatible Operational Risk Capital Framework
16 Pages Posted: 8 May 2018
Date Written: April 23, 2018
This paper proposes an alternative framework to set banks’ operational risk capital, which allows for forward-looking assessments and limits gaming opportunities by relying on an incentive-compatible mechanism. This approach would improve upon the vulnerability to gaming of the AMA and the lack of risk-sensitivity of BCBS’s new standardized approach for operational risk.
Keywords: Banking Regulation, Operational Risk, Regulatory Capital, Incentive Compatibility
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation