Capital market solutions for op risks: Does a credit derivative model make sense?

OP RISK DERIVATIVES

There’s a good case for creating operational risk derivatives using credit derivatives as a model, argues Penny Cagan. But the idea is not free of pitfalls

Banks could in theory manage their operational risks using swap and options contracts that would protect them against losses from such hazards as fraud, technology failure and trade settlement errors.

Such op risk derivative contracts could help reduce the amount of capital banks already tie up to guard against operational risks. They could

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