DP15096 Operational Risk Capital

Author(s):	Thomas Conlon, Xing Huan, Steven Ongena
Publication Date:	July 2020
Keyword(s):	Bank Regulation, Basel II, Measurement Approach, Monitoring, Operational Risk
JEL(s):	G21, G32
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15096

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.