Operational Risk Modeling in Financial Services

CHAPTER 6The Need for Measurement

6.1 REGULATORY REQUIREMENTS

6.1.1 Regulatory Capital: The Evolution of the Basel Accord

The general framework of operational risk capital is the set of Basel accords defined by the Basel Committee for Banking Supervision (BCBS).

The Basel Committee was created in 1974 by the central bank Governors of the Group of 10 countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, United Kingdom, and United States). The Committee is headquartered at the Bank for International Settlements in Basel. It aims at enhancing financial stability by improving the quality of banking supervision worldwide. The Committee membership has now expanded to 45 countries.

The history of the main decisions of the Basel committee can be summarized as follows.

In 1975, a Concordat was published to set out guidelines for co-operation between national authorities in the supervision of banks' foreign establishments. According to BCBS, this accord aimed at avoiding gaps in international supervision so that (1) no banking establishment would escape supervision; and (2) supervision would be adequate and consistent across member jurisdictions.

In 1988, the Basel I accord is mainly focused on credit risk and imposes set a minimum capital to risk-weighted assets of 8%. The principle of this ratio is simple. Assets of a bank were assigned a risk weight (from 0 for cash, claims on central governments, or central banks to ...