Regulatory Arbitrage in the Use of Insurance in the New Standardized Approach for Operational Risk Capital
Abstract: Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this regulatory arbitrage strategy are discussed.
Part of Series: FEDS Notes
Publication Date: 2020-03-30