Is operational risk regulation forward looking and sensitive to current risks?

Marco Migueis

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Need to know

Worries about gaming and comparability have limited the use of forward-looking approaches within the AMA.
The new standardized approach for operational risk capital set by the Basel Committee is backward-looking.
Adjusting for changes in business model and insurance mitigation in a backward-looking framework is challenging.

Abstract

This paper evaluates the operational risk capital requirements of large US banks to determine whether they are forward looking, sensitive to banks’ current exposures and designed to allow for risk mitigation. The paper also discusses modifications that could bring existing regulation closer to these goals, while highlighting the potential pitfalls of doing so. The analysis focuses on the advanced measurement approach, the new standardized approach for dealing with operational risk put forward by the Basel Committee on Banking Supervision and the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR). Unless modified, the new standardized approach is unlikely to be forward looking.

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