An Alternative to the Basel III Endgame Operational Risk Capital Requirements

Introduction

Regulators have proposed new bank capital standards, collectively referred to as the Basel III Endgame (B3E), which impose an entirely new approach to computing capital charges and risk-weighted assets associated with operational risk for the largest banking organizations in the United States. Given the fundamental flaws in the proposed methodology for measuring operational risk in B3E that we have documented in a companion piece, we propose an alternative approach to measure operational risk for determining required bank capital.

This approach, which represents our own views and not an ABA policy recommendation, rests upon a stronger theoretical foundation, is operationally tractable and is analytically consistent.

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This staff analysis represents the views of the co-authors and does not represent an ABA policy recommendation. It is not intended to provide nor substitute for professional legal advice.