Capital and Risk: New Evidence on Implications of Large Operational Losses

31 Pages Posted: 13 Jan 2005

See all articles by Patrick de Fontnouvelle

Patrick de Fontnouvelle

Federal Reserve Bank of Boston - Supervision and Regulation

Virginia De Jesus-Rueff

Genentech, Inc. - San Francisco

John S. Jordan

FitchRisk

Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation

Date Written: September 2003

Abstract

Operational risk is currently receiving significant media attention, as financial scandals have appeared regularly and multiple events have exceeded one billion dollars in total impact. Regulators have also been devoting attention to this risk, and are finalizing proposals that would require banks to hold capital for potential operational losses. This paper uses newly available loss data to model operational risk at internationally active banks. Our results suggest that the amount of capital held for operational risk will often exceed capital held for market risk, and that the largest banks could choose to allocate several billion dollars in capital to operational risk. In addition to capital allocation decisions, our findings should have a direct impact on the compensation and investment models used by large firms, as well as on the optimal allocation of risk management resources.

Keywords: Basel Accord, economic capital, operational risk

JEL Classification: C24, G21, G28

Suggested Citation

de Fontnouvelle, Patrick and De Jesus-Rueff, Virginia and Jordan, John S. and Rosengren, Eric S., Capital and Risk: New Evidence on Implications of Large Operational Losses (September 2003). FRB of Boston Working Paper No. 03-5. Available at SSRN: https://ssrn.com/abstract=648164 or http://dx.doi.org/10.2139/ssrn.648164

Patrick De Fontnouvelle (Contact Author)

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3659 (Phone)
617-973-3219 (Fax)

Virginia De Jesus-Rueff

Genentech, Inc. - San Francisco

1 DNA Way
South San Francisco, CA 94080-4990
United States

John S. Jordan

FitchRisk ( email )

17 State Street
New York, NY 10004
United States

Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3090 (Phone)
617-973-3219 (Fax)

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