It's all in the data - consistent operational risk measurement and regulation

ISSN： 1358-1988

Source： Journal of Financial Regulation and Compliance, Vol.15, Iss.4, 2007-11, pp. : 423-449

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Abstract

Purpose - Amid increased size and complexity of the banking industry, operational risk has a greater potential to occur in more harmful ways than many other sources of risk. This paper seeks to provide a succinct overview of the current regulatory framework of operational risk under the New Basel Accord with a view to inform a critical debate about the influence of data collection, loss reporting, and model specification on the consistency of risk-sensitive capital rules. Design/methodology/approach - The paper's approach is to investigate the regulatory implications of varying characteristics of operational risk and different methods to identify operational risk exposure. Findings - The findings reveal that effective operational risk measurement hinges on how the reporting of operational risk losses and the model sensitivity of quantitative methods affect the generation of consistent risk estimates. Originality/value - The presented findings offer tractable recommendations for a more coherent and consistent regulation of operational risk.