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Working Paper
Benchmarking Operational Risk Stress Testing Models
The Federal Reserve?s Comprehensive Capital Analysis and Review (CCAR) requires large bank holding companies (BHCs) to project losses under stress scenarios. In this paper, we propose multiple benchmarks for operational loss projections and document the industry distribution relative to these benchmarks. The proposed benchmarks link BHCs? loss projections with both financial characteristics and metrics of historical loss experience. These benchmarks capture different measures of exposure and together provide a comprehensive view of the reasonability of model outcomes. Furthermore, we employ ...
Working Paper
Cost of Banking for LMI and Minority Communities
We test whether minimum account balances to avoid fees, maintenance fee amounts, and nonsufficient funds charges are systematically different in LMI and majority-minority communities relative to other communities and find that they are generally higher. The minimum account balance to avoid fees on a noninterest checking account is about $45 higher on average in LMI Census tracts than in higher income tracts, and more than $70 higher on average in majority-minority tracts than in majority-white tracts. We investigate potential sources of these differences such as bank business models, ...
Discussion Paper
How to Design Rules for Ex-Post Evaluation
Ex-ante cost-benefit analyses and other impact assessments are now a standard part of the rulemaking process. Yet some important effects of regulation are difficult—or impossible—to assess before a rule takes effect. In such cases, ex-post (or retrospective) evaluation, conducted after a rule is in effect, offers an opportunity to measure real-world outcomes that could not reliably be predicted in advance.
Working Paper
The Information Value of Past Losses in Operational Risk
Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models allows banks’ management to make more informed risk decisions by better matching economic capital and risk appetite, and allows regulators to enhance their understanding of banks’ operational risk. We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of ...
Discussion Paper
Regulatory Arbitrage in the Use of Insurance in the New Standardized Approach for Operational Risk Capital
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.
Discussion Paper
Is Operational Risk Regulation Forward-looking and Sensitive to Current Risks?
This article evaluates whether US large bank operational risk capital requirements are forward-looking, sensitive to banks' current exposures, and allow for risk mitigation, and discusses modifications that could bring regulation closer to these goals while also highlighting the potential pitfalls of doing so.