Welcome to the first issue of Volume 15 of The Journal of Operational Risk.
One of the key focuses of the Basel Committee on Banking Supervision regarding operational risk management is its requirement that banks increase their reporting and disclosure of operational risk to investors, shareholders and the public more generally. This led them to introduce Pillar 3 of the Basel Accord, which provides guidelines on what banks should be disclosing on a regular basis. It has been many years since this Accord was signed, and we are curious about how banks are doing in terms of reporting these risks, and how this supposedly better approach to risk disclosure and communication has affected risk management.
In this issue of the journal we have two papers that investigate operational risk disclosure. It is interesting to see that larger banks, pushed by regulatory changes to adopt the advanced measurement approach (AMA), disclose better operational risk information, which promotes better operational risk management. I strongly recommend reading these papers as they confirm that more risk disclosure is the key to improved risk management and decision making.
We expect to receive more papers on cyber and IT risks in the future: not only on quantification of those risks but also on better ways to manage them. We would also like to publish more papers on important topics like enterprise risk management (ERM) and everything this broad subject encompasses: establishing risk policies and procedures, implementing firmwide controls, aggregating risk and revamping risk organization. As I have said before, we expect that analytical papers on operational risk measurement will continue to be submitted, but they will now have a focus on stress testing and actually managing those risks. These are certainly exciting times!
The Journal of Operational Risk, as the leading publication in this area, aims to be at the forefront of these discussions. We welcome papers that can shed some light on them.
In this issue, we have two research papers and one forum paper covering operational risk reporting and risk measurement.
In the issue’s first paper, “Risk capital reserve and measurement precision in modeling heavy-tailed single operational losses”, Jianming Mo and Xiang Gao attempt to quantify single operational losses using a general convolution approach and, at the same time, to compute the precision of the quantification output using error propagation theory. By running these two models simultaneously and jointly, the authors find a nonmonotonic relationship between the risk capital estimate and its precision, with exact patterns determined by a set of characteristic parameters of the loss distributions chosen. The paper provides a rationale for adopting a quantitative buffer capital, designed to absorb variations due to measurement errors, especially those originating from estimation risk.
“What do risk disclosures reveal about banking operational risk processes? Content analysis of banks’ risk disclosures in the Visegrad Four countries” by Gabriella Lamanda and Zsuzsanna Tamasne Voneki, our second paper, analyzes the operational risk disclosure practices of twenty-six large banks in the Visegrad group of countries (Czech Republic, Hungary, Poland and Slovakia) in the period 2008–16. The authors examine the content and the quality of operational risk reporting, relying on these banks’ annual reports. Both descriptive statistics and multiple regression analysis are applied to evaluate how the firms’ financial and governance characteristics are associated with operational risk disclosures. A regression analysis of the risk disclosures shows that larger banks (ie, banks with larger total assets) who were required by regulators to implement the Basel AMA to assess their operational risks provided more risk-sensitive and informative reports; these helped to keep investors and clients up to date with the operational risks to which the banks were exposed.
In our forum paper, “Difference between the determinants of operational risk reporting in Islamic and conventional banks: evidence from Saudi Arabia”, Wael Hemrit investigates the operational risk reporting practices of Islamic banking institutions (IBIs) and conventional banks (CBs) in Saudi Arabia. Moreover, the author explores the joint effect of banking characteristics, corporate governance and credit rating on the informational content of operational risk disclosure. He uses content analysis to collect operational risk disclosure data from annual reports during the period 2008–15. The results for each bank type show that the enhanced operational risk disclosure in IBIs is negatively associated with the number of bank branches, the financial stability of the bank, the frequency of board meetings, the proportion of independent members on the board, and credit rating. The results for CBs demonstrate that a bank’s size and financial stability are positively associated with operational risk dis- closure. Conversely, the operational risk disclosure level is negatively affected by board meeting frequency and the number of bank branches. For the overall sample, the author’s empirical results show that bank size, compliance with Sharia requirements and board size have a positive, significant effect on operational risk disclosure, while the number of bank branches and the proportion of independent members on the board have a negative, significant relationship with the disclosure level.
This paper provides a rationale for adopting quantitative buffer capital, designed to absorb variations due to measurement errors, especially those originating from the estimation risk.
What do risk disclosures reveal about banking operational risk processes? Content analysis of banks’ risk disclosures in the Visegrad Four countries
Difference between the determinants of operational risk reporting in Islamic and conventional banks: evidence from Saudi Arabia
In this study, the author investigates the operational risk reporting practices of Islamic banking institutions (IBIs) and conventional banks (CBs) in Saudi Arabia. Moreover, the author explores the joint effect of banking characteristics, corporate…