Discussion Paper

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.

https://doi.org/10.17016/2380-7172.2479

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Bibliographic Information

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

Part of Series: FEDS Notes

Publication Date: 2020-03-30

Number: 2020-03-30