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Capital and Risk: New Evidence on Implications of Large Operational Losses
Company: Federal Reserve Bank of Boston
Year Of Publication: 2003
Month Of Publication: September
Pages: 31
Download Count: 740
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Comment Num: 0
Language: EN
Source: working paper
Who Can Read: Free
Date: 3-5-2005
Publisher: Administrator
Operational risk is currently receiving significant media attention, as financialscandals have appeared regularly and multiple events have exceeded one billiondollars in total impact. Regulators have also been devoting attention to this risk,and are finalizing proposals that would require banks to hold capital forpotential operational losses. This paper uses newly available loss data to modeloperational risk at internationally active banks. Our results suggest that theamount of capital held for operational risk will often exceed capital held formarket risk, and that the largest banks could choose to allocate several billiondollars in capital to operational risk. In addition to capital allocation decisions,our findings should have a direct impact on the compensation and investmentmodels used by large firms, as well as on the optimal allocation of riskmanagement resources.
This document is published in Journal of Money, Credit, and Banking (volume 38, number 7) October 2006, 1819-1846.
de Fontnouvelle, Patrick Sign in to follow this author
DeJesus-Rueff, Virginia Sign in to follow this author
Jordan, John Sign in to follow this author
Rosengren, Eric Sign in to follow this author
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