Forward-looking and incentive-compatible operational risk capital framework

Keywords: Banking Regulation, Operational Risk, Regulatory Capital, Incentive Compatibility.
  • 18 Septiembre 2017

Por Marco Migueis

Finance and Economics Discussion Series 2017-087.

Abstract:

The Advanced Measurement Approach (AMA) to operational risk capital is vulnerable to gaming, complex, and lacks comparability. The Standardized Measurement Approach (SMA) to operational risk capital lacks risk sensitivity and is unlikely to be appropriately conservative for US banks. An alternative framework is proposed that addresses the weaknesses of these approaches by relying on an incentive‐compatible mechanism to elicit forward‐looking projections of loss exposure.

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