Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Title:
A Test of the Strategic Effect of Basel II Operational Risk Requirements on Banks
Author(s): by Carolyn Currie
Date of publication: September 2005
Working paper number: 143
Abstract:
Most problematic of the Basel II capital adequacy requirements is the subset of Pillar I, requiring provision for operational risk (OR) as distinct from credit and market risk. Previous tests of the strategic effect of this new regulation from three prior Quality Impact Studies (QIS) conducted in G10 countries under the guidance of the Bank for International Settlements, have concluded that OR requirements poses difficulties of definition, implementation, and strategic planning. Anticipated strategic effects include dramatic changes to product development, investment and asset mix, as well as the necessity to rapidly develop new risk rating models and techniques, together with vastly expanded internal and external audit compliance routines. Unlike QIS1, 2 and 3, QIS4 focuses on operational risk, but still has drawbacks. This paper discusses its approach, in view of the ongoing difficulties that banks are experiencing with operational risk, particularly in the construction of a database. It concludes by listing the unanswered questions that have not even been addressed in four studies of the strategic impact of Basel II’s OR requirements. It also suggests that many smaller banks and emerging nations may not be able to use the sophisticated approaches and hence will suffer a competitive disadvantage. Hence in view of drawbacks in the simpler approaches such as lack of correlation of operational risk and revenue, other indicators such as the standard deviation of efficiency measures are suggested.
Paper: Download (Format: PDF, Size: 438 Kb)
Comments: Published as: Currie, C., 2006, "A Test of the Strategic Effect of Basel II Operational Risk Requirements on Banks", The IUP Journal of Monetary Economics, IV(4), 6-28.
Known citations:

Benston, G., 2007, "Basel II and Bankers’ Propensity to Take or Avoid Excessive Risk", Atlantic Economic Journal, 35(4), 373-382.

Cai, Z. and Wheale, P., 2007, "The New Capital Accord and the Chinese Banking Industry", Journal of Banking Regulation, 8, 262-289.

Cai, Z. and Wheale, P., 2009, "Managing Efficient Capital Allocation with Emphasis on the Chinese Experience", Journal of Business Ethics, 87(1), 111-135.

Chernobai, A. and Rachev, S. T., 2006, "Applying Robust Methods to Operational Risk Modeling", Journal of Operational Risk, 1(1), 27-41.

Couto, G. and Bulhões, K., 2008, "Basel II: Operational Risk Measurement in the Portuguese Banking Sector and an Evaluation of the Quantitive Impacts", Working Paper Number: 07/2008, Universidade dos Açores

de Carvalho, R. I. Q. G., 2007, "Diagnosis of Implementation and Impact Study of Operational Risk Under Basel II", Thesis, Masters in Finance, Technical University of Lison.

Dima, M. A., 2009, "Operational Risk Assesement Tools for Quality Management in Banking Services", The Amfiteatru Economic Journal, 11(26), 364-372.

Dima, M. A., 2009, "Credit Analysis", Working Paper.

Dima, M. A. Orzea, I, 2009, "Risk Management in Banking", Working Paper.

Gonçalves, R. A. H, 2011, "Sistemas de informação para gestão de risco operacional em instituições financeiras", Paper, Technical University of Lison.

Gregoriou, G. N. and Jobst, A. A., 2009, "Consistent Quantitative Operational Risk Measurement", in Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation, 23-68.

Jobst, A. A., 2007, "It’s All in the Data – Consistent Operational Risk Measurement and Regulation", Journal of Financial Regulation and Compliance, 15(4), 423-449.

Jobst, A. A., 2007, "The Treatment of Operational Risk under the New Basel Framework – Critical Issues", Journal of Banking Regulation, 8, 316-352.

Jobst, A. A., 2007, "Modeling Constraints and Statistical Issues of Consistent Operational Risk Measurement", Working Paper.

Jobst, A. A., 2007, "Constraints of Operational Risk Measurement and the Treatment of Operational Risk Under the New Basel Framework", Working Paper.

Hughes, P., 2007, "Operational Risk: The Direct Measurement of Exposure and Risk in Bank Operations", Journal of Risk Management in Financial Institutions, 1(1), 25-43.

Li, S., "Exploring How "Smart" the Basel II Framework is in the Australian Context of Banking Reform", PhD Thesis, Newcastle Business School, University of Newcastle.

McConnell, P. J., 2006, "A Perfect Storm – Why Are Some Operational Losses Larger than Others?", Working Paper.

McConnell, P. J., 2008, "Operational Risk - Opportunities for Accounting Research", Journal of Law and Financial Mangement, 7(2), 26-34.

Moosa, I. A, 2010, "Basel II as a Casualty of the Flobal Financial Crisis", Journal of Banking Regulation, 11(2), 95-114.

Moosa, I. A, 2012, "Basel 2.5: A Lot of Sizzle But Little Nutritional Value", Journal of Banking Regulation, 13(4), 320-335.

Samirkas, M. C., 2009,"TÜRKİYE’DE MALİ TAHLİL VE İSTİHBARAT ÇALIŞMALARININ BASEL II STANDARTLARINA UYUMU VE KATILIM BANKALARI ÜZERİNDE BİR UYGULAMA", Masters Thesis.