Working Paper: CEPR ID: DP15096
Authors: Thomas Conlon; Xing Huan; Steven Ongena
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.
Keywords: bank regulation; Basel II; measurement approach; monitoring operational risk
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Introduction of operational risk capital requirements under Basel II (G28) | Reduction in realized operational risk losses for treated European banks (G21) |
| Banks using advanced measurement or standardized approaches (G21) | Lower operational risk losses (G33) |
| Banks using basic indicator approach (G21) | No significant impact on operational risk losses (G33) |
| Not constrained by capital requirements prior to treatment (G28) | Reduction in operational risk losses (G33) |
| Low institutional ownership (G32) | Reduction in operational risk losses post-treatment (G22) |