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Title: Operational Risk Capital

Author(s): Thomas Conlon, Xing Huan and Steven Ongena

Publication Date: July 2020

Keyword(s): Bank Regulation, Basel II, Measurement Approach, Monitoring and Operational Risk

Programme Area(s): Financial Economics

Abstract: We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.

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Bibliographic Reference

Conlon, T, Huan, X and Ongena, S. 2020. 'Operational Risk Capital'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15096