Regulatory Arbitrage in the Use of Insurance in the New Standardized Approach for Operational Risk Capital
Marco Migueis
Abstract
Marco Migueis
Abstract
Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this regulatory arbitrage strategy are discussed.
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Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this regulatory arbitrage strategy are discussed.
Key concepts: Arbitrage, Capital requirement, Operational risk, Incentive, Risk arbitrage, Business, Capital (architecture), Risk-adjusted return on capital