Welcome to the first issue of Volume 16 of The Journal of Operational Risk.
This is a particularly strong issue of our journal. Although it is not a special issue, all four of its papers touch on regulation of operational risk. Two of the papers were written by regulators and regular contributors to our journal: one talks about possible regulatory capital arbitrage, and the other is a masterclass in what we have learned from the 2008 financial crisis, written by a very experienced and senior regulator. Two must-read pieces for practitioners and academics. We also have a paper that looks at the differences in operational risk regulation between developed and emerging countries, as well as an interesting study in which the author uses an algorithm to sift through Basel regulations and Asian countries’ local regulations to see where they converge and where they diverge. All this makes for a fascinating issue, and I hope our readers and subscribers appreciate it.
In terms of the subjects on which we are interested in seeing more papers, operational risk resilience is one of the key focuses of the industry right now. We would certainly welcome more submissions on this topic. In addition, we welcome further papers on cyber and IT risks: not only on the quantification of these risks but also on better ways to manage them. We would also like to publish more papers on important topics such as enterprise risk management and everything this broad subject encompasses: establishing risk policies and procedures, implementing firm-wide 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 light on them.
In this issue, we have three very interesting research papers and one forum paper. We are continuing our tradition of exploring operational risk management implementation across the world: this time, we are in the ASEAN countries.
In our first paper, “Regulatory arbitrage in the use of insurance in the new standardized approach for operational risk capital”, Marco Migueis of the Federal Reserve Board – a regular contributor to The Journal of Operational Risk – notes that 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 likely have an incentive to insure against recurring losses. Such insurance can meaningfully reduce capital requirements even though it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this potential regulatory arbitrage strategy are discussed by the author in this interesting piece.
In the issue’s second paper, “Measurement of operational risk regulatory capital in the banking sector: developed countries versus emerging markets”, Medhat A. Hassanein, Mohammed Bouaddi and Talha Karim continue discussing arbitrage opportunities in regulatory capital. The authors explore several models to specify the marginal and joint distributions of the types of operational losses that reflect loss frequencies and severity distribution(s), using international data published by a group of banks from developed and emerging economies. Their results reveal that a uniform approach to model operational risk in both types of economy may lead to the overestimation or underestimation of regulatory capital in banks. This could result in opportunity costs of holding excessive capital to mitigate operational losses, or in extra costs resulting from an underestimation of the capital required.
In our third paper, “Bank supervision: lessons from the post-2008 banking crisis”, Jeremy Quick, an editorial board member since the foundation of The Journal of Operational Risk and a longtime friend, considers the learning points from official third-party reports produced in the wake of supervisory failures that can be applied to front-line bank supervisors’ management. The period covered is mostly during and after the recent banking crisis that started in 2008. While each third-party case study is unique, 12 generic factors relating to front-line supervisory failures emerge. This is a fantastic paper that I strongly recommend our subscribers read.
In the only paper in this section, “The impact of culture upon operational risk management guidelines in the banking sector of selected Asian countries”, Mihaela Mocanu claims that the Basel Committee on Banking Supervision promotes a banking supervision policy that is based on the idea of “enforced self-regulation”. Thus, the central banks of different countries regulate operational risk management (ORM) according to the specificities of their national banking industry. The paper looks at the hypothesis that this regulatory openness results in legal texts that are highly influenced by the culture of the country in which each central bank issuing guidelines on ORM is located. The author analyzes a corpus of approximately 50 000 words that feature in ORM guidelines published in English by the central banks of China, Hong Kong, India, Indonesia, Japan, Singapore and South Korea. By applying the Kendall coefficient, the following significant correlations have been found: (a) the higher the masculinity dimension, the less clear the text; and (b) the higher the masculinity dimension, the less prescriptive the text. Moreover, Mocanu’s content analysis reveals that each operational risk-related item has a different weight in the guidelines of different countries. The research results should be useful to regulators looking to fine-tune their decisions in different cultural environments.
The impact of culture upon operational risk management guidelines in the banking sector of selected Asian countries
The central banks of different countries regulate ORM according to the specificities of their national banking industry. This paper tests the hypothesis that such regulatory openness results in legal texts that are highly influenced by the culture of the…
Measurement of operational risk regulatory capital in the banking sector: developed countries versus emerging markets
This paper addresses operational risk as a fundamental risk type faced by banks in emerging and developed economies.
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 likely have an incentive to insure recurring losses. Such insurance can meaningfully reduce…
This paper considers the learning points from official third-party reports produced in the wake of supervisory failures that can be applied to the management of front-line bank supervisors.