«Regulating and Supervising Operational Risk for Banks Abstract: There is a renewed interest of banks and supervisors in operational risk. In the new ...»
• In the case of Pillar two, the regulatory authorities ought to ascertain whether the banks are adhering to best practice in their corporate governance and internal control systems.33 They should take action if this is not the case.
• In the case of Pillar three, the regulatory authorities should prescribe that banks provide systematic and transparent reporting on operational risks to their shareholders and the public. Positive and powerful incentives for boards of directors and management can be expected from the reputational aspects and possible civil law actions often associated with operational risks.
Generally speaking I have reservations about the direction in which the regulatory authorities have been seeking to develop capital adequacy requirements recently. The recipe seems to be: ever more detailed regulations and an ever greater depth of information required, which is equivalent to risk disaggregation. In so doing, the authorities are following management practice at leading banks and the methods of academic research, and they are doing so ever more closely. In so doing the regulatory authorities are de facto releasing the banks’ executive 32 Shadow Financial Regulatory Committees of Europe Japan and the U.S. (1999), p.4.
managements from having to answer one of the most important questions of all: what is the appropriate level of capital for my bank?
With their current approach of requiring capital underpinning for operational risks the regulatory authorities risk making regulatory rules out of proposed solutions that even well-managed banks have never applied successfully in detail and over a period of time and that have not been seriously entertained by the academic community either thus far.
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