Constraints of Consistent Operational Risk Measurement and Regulation: Data Collection and Loss Reporting

Abstract

Amid increased size and complexity of the banking industry, operational risk has a greater potential to transpire in more harmful ways than many other sources of risk. This paper provides a succinct overview of the current regulatory framework of operational risk under the New Basel Accord with a view to inform a critical debate about the influence of data collection, loss reporting, and model specification on the consistency of risk-sensitive capital rules. In particular, the paper investigates the regulatory implications of varying characteristics of operational risk and different methods to identify operational risk exposure. The presented findings offer tractable recommendations for a more coherent and consistent regulation of operational risk.

Keywords: risk management, operational risk, risk management, financial regulation, Basel Committee, Basel II, New Basel Capital Accord, fat tail behavior, extreme tail behavior

JEL Classification: G10, G21, K20