Working Paper

Forward-looking and Incentive-compatible Operational Risk Capital Framework

Abstract: 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; Incentive Compatibility; Operational Risk; Regulatory Capital;

JEL Classification: G21; G28; G32;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-08-07

Number: 2017-087

Pages: 16 pages