Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation

CHAPTER 15

Operational Risk Versus Capital Requirements under New Italian Banking Capital Regulation: Are Small Banks Penalized?

A Clinical Study

Simona Cosma, Giampaolo Gabbi, and Gianfausto Salvadori

 

 

ABSTRACT

Our research finds out the potential competitive impact of the new Italian Banking capital regulation for operational risks. Unlike the approach underlying the new discipline of the United States and many European countries, the Italian regulation allows access to the advanced measurement approaches (AMA) only to banks and financial intermediaries whose size or specialization requirements meet predefined levels. In our research we compare the capital at risk (estimated with a one-year holding period and a 99.9% confidence interval) and the capital charge calculated by basic indicator methodology. Using operational loss data of one bank that does not meet regulation constraints, we show how the new supervisory regulations on capital requirements unfairly could penalize a large group of intermediaries.

15.1 INTRODUCTION

The new regulation for Italian banks rely on a number of methodologies to compute capital requirements regarding operational risk. The main purposes of the regulations are to: (1) make the methods accurate in terms of having a proportional risk exposure for each bank; (2) maintain regulation efforts, especially for small intermediaries; and (3) enhance operational risk management in the regulatory fashion.

Since the rationale should be to pursue more ...