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Working Paper
Cost of Banking for LMI and Minority Communities
Bank accounts are critical for participation in the modern economy. However, these accounts frequently require maintenance fees and incur overdraft charges. We assess whether minimum account balances to avoid fees, account maintenance fee amounts, and non-sufficient funds charges are systematically different in LMI and majority-minority communities, and find that they are generally higher. For example, the minimum account balance to avoid fees in a non-interest checking account is about $50 higher in LMI Census tracts than in higher income tracts, and $75 higher in majority-minority tracts. ...
Working Paper
Predicting Operational Loss Exposure Using Past Losses
Operational risk models, such as the loss distribution approach, frequently use past internal losses to forecast operational loss exposure. However, the ability of past losses to predict exposure, particularly tail exposure, has not been thoroughly examined in the literature. In this paper, we test whether simple metrics derived from past loss experience are predictive of future tail operational loss exposure using quantile regression. We find evidence that past losses are predictive of future exposure, particularly metrics related to loss frequency.
Working Paper
Benchmarking Operational Risk Models
The 2004 Basel II accord requires internationally active banks to hold regulatory capital for operational risk, and the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) requires banks to project operational risk losses under stressed scenarios. As a result, banks subject to these rules have measured and managed operational risk more rigorously. But some types of operational risk - particularly legal risk - are challenging to model because such exposures tend to be fat-tailed. Tail operational risk losses have significantly impacted banks' balance sheets and income ...
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.
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.
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 ...