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Working Paper
Forward-looking and Incentive-compatible Operational Risk Capital Framework
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.
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.
Discussion Paper
Outlining and Measuring the Benefits of Risk Sensitivity in Bank Capital Requirements
Banks have incentives to operate with lower capital ratios than would be socially optimal due to deposit insurance and implicit government guarantees that socialize part of the costs of bank failures, particularly for the largest banks. Given these incentives, regulatory capital requirements contribute to the safety and soundness of individual banks and to financial stability by setting minimum expectations for the amount of loss-absorbing equity that banks need to employ in their funding.
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.
Working Paper
Effect of the GSIB surcharge on the systemic risk posed by the activities of GSIBs
This study assesses whether the introduction of the GSIB surcharge requirement resulted in GSIBs reducing the systemic risk posed by their activities. We find limited evidence of GSIBs managing their activities to avoid increases in their surcharges. For a sample of international banks, proximity to surcharge thresholds is associated to a decrease in the growth of intra-financial system liabilities, underwriting activities, and holdings of trading and available-for-sale securities. In the case of US GSIBs and the method 2 GSIB surcharge, we find some association between proximity to surcharge ...