Operational Risk A Guide To Basel II

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}}}}\paperw8640\paperh12960\margl666\margr133\margt666\margb333
\cols2\colno1\colw6773\colsr-0\colno2\colw1066\pard\li413\ri0\sl-213\slmult0 \fs
18\cf0\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100 {Operational
Risk Is Not Just \uc1\u8216X\uc1\u8216XOther\uc1\u8217X\uc1\u8217X Risks}\par\c
olumn\pard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-213\slmult0 \fs2
2\cf0\f0\charscalex100 {7}\par\pard\sect\sectd\sbknone\pard\li413\ri0\sl-213\slm
ult0 \fs18\cf0\par\pard\li413\ri0\sl-386\slmult0 \fs20\cf0\f0\charscalex100 {con
sequences of internal fraud, una}\fs20\cf0\f0\charscalex100 {uthorized trading,
and poor internal}\par\pard\li413\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100
{surveillance and control.}{\super \fs14\up2\cf0\f0\charscalex100 {8}}\par\pard\
li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-360\slmult0 \fs22\cf0\f
0\charscalex100 {Daiwa Bank, 1995, New York}\par\pard\li413\ri0\sl-360\slmult0 \
fs18\cf0\f0\charscalex100 {On July 13, 1995, the executive vice president of Jap
an\uc1\u8217Xs Daiwa Bank\uc1\u8217Xs}\par\pard\li413\ri0\sl-240\slmult0 \fs18\c
f0\f0\charscalex100 {New York branch, Toshihide Iguchi, confessed (in a 30-page
letter to the}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {pre
sident of Daiwa Bank in Japan) that he had lost around $1.1 billion}\par\pard\li
413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {trading U.S. Treasury bonds.
At the time of the incident, Daiwa was one}\par\pard\li413\ri0\sl-240\slmult0 \f
s18\cf0\f0\charscalex100 {of Japan\uc1\u8217Xs top 10 banks and one of the world
\uc1\u8217Xs top 20 banks in terms of}\par\pard\li413\ri0\sl-240\slmult0 \fs18\c
f0\f0\charscalex100 {asset size. An astonishing part of the incident is that Igu
chi\uc1\u8217Xs illegal trading}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\
charscalex100 {had been taking place over an 11-year period. Daiwa\uc1\u8217Xs N
ew York branch}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {ma
naged the custody of the U.S. Treasury bonds that it bought, as well as}\par\par
d\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {those that it bought on b
ehalf of its customers, via a sub-custody account}\par\pard\li413\ri0\sl-226\slm
ult0 \fs18\cf0\f0\charscalex100 {held at Bankers Trust. Through this account, in
terest on the bonds was}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscal
ex100 {collected and dispersed, and bonds were transferred or sold according to}
\par\pard\li413\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {the wishes of eit
her customers or the bank\uc1\u8217Xs own managers.}\par\pard\li773\ri0\sl-240\s
lmult0 \fs18\cf0\f0\charscalex100 {When Iguchi lost a few hundred thousand dolla
rs in his trading activities,}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\ch
arscalex100 {he began selling off bonds in the Bankers Trust subcustody account
to pay}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {off his lo
sses, falsifying Bankers Trust account statements so that they would}\par\pard\l
i413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {not indicate that the securi
ties had been sold. Throughout the 11 years he}\par\pard\li413\ri0\sl-240\slmult
0 \fs18\cf0\f0\charscalex100 {forged about 30,000 trading slips and }\fs18\cf0\f
0\charscalex100 {other documents. When customers}\par\pard\li413\ri0\sl-240\slmu
lt0 \fs18\cf0\f0\charscalex100 {needed to be paid interest on bonds that had bee
n sold without their}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex1
00 {knowledge, Iguchi would settle their accounts by selling off more securities
}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {and further alte
ring more records. In total, Iguchi sold off roughly $377}\par\pard\li413\ri0\sl
-226\slmult0 \fs18\cf0\f0\charscalex100 {million of Daiwa\uc1\u8217Xs customers\
uc1\u8217X securities and $733 million of Daiwa\uc1\u8217Xs own}\par\pard\li413\
ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {investment securities to cover hi
s trading losses. Shortly after the incident}\par\pard\li413\ri0\sl-240\slmult0
\fs18\cf0\f0\charscalex100 {came to surface in November 1995, the Federal Reserv
e ordered Daiwa}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {B
ank to end all of its U.S. operations within 90 days; by January 1996}\par\pard\
li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {Daiwa agreed to sell most o

f its U.S. assets of $3.3 billion to Sumitomo}\par\pard\li413\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {Bank and to sell off its 15 U.S. of\uc1\u64257Xces.
}\par\pard\li773\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {In December 1996
, Iguchi was sentenced to four years in prison and}\par\pard\li413\ri0\sl-240\sl
mult0 \fs18\cf0\f0\charscalex100 {\uc1\u64257Xned $2.6 million. The scandal led
to Standard & Poors downgrading Daiwa}\par\pard\li413\ri0\sl-240\slmult0 \fs18\c
f0\f0\charscalex100 {from A to BBB and to Japan\uc1\u8217Xs Ministry of Finance
imposing restrictions}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex
100 {on the bank\uc1\u8217Xs activities for a year. In September 2000, a Japanes
e court}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {in Osaka
ordered 11 current and former Daiwa board members and top}\par\pard\li413\ri0\sl
-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li41
3\ri0\sl-226\slmult0 \fs10\cf0\f0\charscalex100 {8}\fs16\cf0\f0\charscalex100 {D
etailed reports on the case include \uc1\u8216X\uc1\u8216XN}\fs16\cf0\f0\charsca
lex100 {ot Just One Man\uc1\u8212XBarings\uc1\u8217X\uc1\u8217X by L. Chew,}\par
\pard\li413\ri0\sl-226\slmult0 \fs16\cf0\f0\charscalex100 {Bank of England (1995
a), Bank of England (1995b), and Koernert (1996). A number}\par\pard\li413\ri0\s
l-213\slmult0 \fs16\cf0\f0\charscalex100 {of books have been written about the c
ase: Rawnsley (1995), Fay (1997), Gapper}\par\pard\li413\ri0\sl-226\slmult0 \fs1
6\cf0\f0\charscalex100 {and Denton (1996), Leeson (1997), and Leeson and Tyrrell
(2005). The case was}\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex
100 {turned into a movie,}{ }\fs18\cf0\f0\charscalex100\i {Rogue Trader}\i0 \fs1
8\cf0\f0\charscalex100 {, released in June 1999.}\par\pard\sect\sectd\sbknone\pa
rd\sect\sectd\sbkpage{\shp
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fs22\cf0\f0\charscalex100 {Operational Risk Type, Event Type, and Loss Type}\par
\pard\li440\ri0\sl-360\slmult0 \fs18\cf0\f0\charscalex100 {Confusion arises in t
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sk type (or hazard type), event type, and loss type. When banks}\par\pard\li440\
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l-213\slmult0 \fs18\cf0\f0\charscalex100 {capital/Minimum}\par\pard\li600\ri0\sl
-226\slmult0 \fs18\cf0\f0\charscalex100 {regulatory capital}\par\column\pard\li0
\ri0\sl-213\slmult0 \fs18\cf0\f0\charscalex100\b {Median Mean Minimum percentile
percentile Maximum}\b0 \par\pard\li80\ri0\sl-360\slmult0 \*\tx1386\*\tx2226\*\t
x3053\*\tx3920\fs18\cf0\f0\charscalex100 {0.150 0.149}\tab \fs18\cf0\f0\charscal
ex100 {0.009}\tab \fs18\cf0\f0\charscalex100 {0.086}\tab \fs18\cf0\f0\charscalex
100 {0.197}\tab \fs18\cf0\f0\charscalex100 {0.351}\par\pard\li80\ri0\sl-213\slmu
lt0 \fs18\cf0\par\pard\li80\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li80\ri0\sl-24

0\slmult0 \*\tx1386\*\tx2226\*\tx3053\*\tx3893\fs18\cf0\f0\charscalex100 {0.128
0.153}\tab \fs18\cf0\f0\charscalex100 {0.009}\tab \fs18\cf0\f0\charscalex100 {0.
074}\tab \fs18\cf0\f0\charscalex100 {0.170}\tab \fs18\cf0\f0\charscalex100 {0.87
6}\par\pard\sect\sectd\sbknone\pgwsxn8640\pghsxn12960\marglsxn666\margrsxn133\pa
rd\li426\ri0\sl-360\slmult0 \fs18\cf0\f0\charscalex100 {Source: BIS (2001b, p. 2
6). Permission to use t}\fs18\cf0\f0\charscalex100 {his table was obtained from
the Basel}\par\pard\li426\ri0\sl-213\slmult0 \fs16\cf0\f0\charscalex100 {Committ
ee on Banking Supervision. The ori}\fs16\cf0\f0\charscalex100 {ginal table is av
ailable free of charge}\par\pard\li426\ri0\sl-213\slmult0 \fs18\cf0\f0\charscale
x100 {from the BIS website (www.BIS.org).}\par\pard\li426\ri0\sl-213\slmult0 \fs
18\cf0\par\pard\li426\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li426\ri0\sl-306\slm
ult0 \fs18\cf0\f0\charscalex100 {CAPITAL ALLOCATION FOR OPERATIONAL, MARKET,}\pa
r\pard\li426\ri0\sl-280\slmult0 \fs18\cf0\f0\charscalex100 {AND CREDIT RISKS}\pa
r\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-293\slmult0 \fs1
8\cf0\f0\charscalex100 {The primary role of a capital charge imposed by bank reg
ulators is to serve}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex10
0 {as a buffer to protect against the damage resulting from risk. It can also be
}\par\pard\li413\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {seen as a form o
f self-insurance tool.}\par\pard\li773\ri0\sl-240\slmult0 \fs18\cf0\f0\charscale
x100 {A clear distinction should be made between two types of risk capital,}\par
\pard\li413\ri0\sl-240\slmult0 \*\tx4120\*\tx5746\fs18\cf0\f0\charscalex100 {eco
nomic capital and regulatory capital.}\tab \fs18\cf0\f0\charscalex100\i {Economi
c capital}\i0 \tab \fs18\cf0\f0\charscalex100 {is de\uc1\u64257Xned as}\par\pard
\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {the amount of capital mark
et forces dictate for risk in a bank.}{ }\fs18\cf0\f0\charscalex100\i {Regulator
y}\i0 \par\pard\li413\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100\i {capital}\
i0 { }\fs18\cf0\f0\charscalex100 {is the amount of capital necessary to provide
adequate coverage of}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex1
00 {banks\uc1\u8217X exposures to \uc1\u64257Xnancial risks. A one-year}{ }\fs18
\cf0\f0\charscalex100\i {minimum regulatory capital}\i0 \par\pard\li413\ri0\sl-2
40\slmult0 \fs18\cf0\f0\charscalex100 {(MRC) is calculated as 8% of reported ris
k-weighted assets for the year in}\par\pard\li413\ri0\sl-240\slmult0 \fs20\cf0\f
0\charscalex100 {question.}\par\pard\li773\ri0\sl-240\slmult0 \fs18\cf0\f0\chars
calex100 {Large, internationally active banks allocate roughly $2 billion to $7}
\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {billion to operat
ional risk.}{\super \fs12\up2\cf0\f0\charscalex100 {25}}\fs18\cf0\f0\charscalex1
00 {According to Jorion (2000), current estimates}\par\pard\li413\ri0\sl-240\slm
ult0 \fs18\cf0\f0\charscalex100 {suggest that the allocation of total \uc1\u6425
7Xnancial risk of a bank is roughly 60% to}\par\pard\li413\ri0\sl-240\slmult0 \f
s18\cf0\f0\charscalex100 {credit risk, 15% to market risk and liquidity risk, an
d 25% to operational}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex1
00 {risk. However, Cruz (2002) suggests an allocation of 50% credit risk, 15%}\p
ar\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {market risk and liq
uidity risk, and 35% operational risk, while Crouhy,}\par\pard\li413\ri0\sl-240\
slmult0 \fs18\cf0\f0\charscalex100 {Galai, and Mark (2001) suggest an allocation
of 70%, 10%, and 20% to}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charsca
lex100 {credit risk, market risk and liquidity risk, and operational risk, respe
ctively.}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {Accordin
g to the BIS (2001a), the portion of economic capital allocated to}\par\pard\li4
13\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {operational risk ranges from 1
5% to 25%. A 2000 Loss Data Collection}\par\pard\li413\ri0\sl-240\slmult0 \fs18\
cf0\f0\charscalex100 {Exercise carried out by the Risk Management Group of the B
IS revealed the}\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\
sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-293\slmult0 \fs12\cf0\f0\charscal
ex100 {25}\fs18\cf0\f0\charscalex100 {See de Fontnouvelle, DeJesus-Rueff, Jordan
, and Rosengren (2003).}\par\pard\sect\sectd\sbknone\pgwsxn8640\pghsxn12960\marg
lsxn666\margrsxn133\pard\sect\sectd\sbkpage{\shp
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0\par\pard\li440\ri0\sl-213\slmult0 \fs22\cf0\f0\charscalex100 {30}\par\column\p
ard\li0\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li0\ri0\sl-213\slmult0 \fs14\cf0\f
0\charscalex100 {OPERATIONAL RISK}\par\pard\sect\sectd\sbknone\pgwsxn8640\pghsxn
12960\marglsxn666\margrsxn133\pard\li440\ri0\sl-213\slmult0 \fs18\cf0\par\pard\l
i440\ri0\sl-386\slmult0 \fs20\cf0\f0\charscalex100 {overall allocation of minimu
m regulatory/economic capital to operational}\par\pard\li440\ri0\sl-240\slmult0
\fs20\cf0\f0\charscalex100 {risk across 41 banks shown in Table 2.3.}\par\pard\l
i440\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li440\ri0\sl-320\slmult0 \fs18\cf0\f0
\charscalex100 {IMPACT OF OPERATIONAL RISK ON THE MARKET VALUE}\par\pard\li440\r
i0\sl-280\slmult0 \fs18\cf0\f0\charscalex100 {OF BANK EQUITY}\par\pard\li440\ri0
\sl-213\slmult0 \fs18\cf0\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charsca
lex100 {As stated earlier in this chapter, losses due to operational risk can be
direct}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {and indir
ect. Some studies of operational risk have addressed the assessment}\par\pard\li
440\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {of the indirect impact of ope
rational risk on the market value of a bank\uc1\u8217Xs}\par\pard\li440\ri0\sl-2
40\slmult0 \fs18\cf0\f0\charscalex100 {equity. In particular, several studies ex
plored reputational risk caused by}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\
f0\charscalex100 {operational loss events, and its impact on the market value of
a bank.}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {Reputati
onal damage in\uc1\u64258Xicted on a bank as a result of an operational loss}\pa
r\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {can be viewed as an
indirect operational loss. Perry and de Fontnouvelle}\par\pard\li440\ri0\sl-226\
slmult0 \fs18\cf0\f0\charscalex100 {(2005) argue that, from the point of view of
shareholders, operational}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\chars
calex100 {loss announcements convey negative information about the bank\uc1\u821
7Xs internal}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {acti
vities and signal direct adverse effect on the future cash \uc1\u64258Xows gener
ated}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {by the bank.
Therefore, the bank\uc1\u8217Xs stock price will be directly affected by}\par\p
ard\li440\ri0\sl-240\slmult0 \fs20\cf0\f0\charscalex100 {such an announcement.}{
\super \fs14\up3\cf0\f0\charscalex100 {26}}\par\pard\li800\ri0\sl-226\slmult0 \f
s18\cf0\f0\charscalex100 {For example, Cummins, Lewis, and Wei (2004) examine th
e effect of}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {the a

nnouncements of large operational loss events on the market value of}\par\pard\l
i440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {a \uc1\u64257Xnancial \uc1\u
64257Xrm. They argue that announcements of large operational loss}\par\pard\li44
0\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {events (i.e., losses that excee
d $10 million) have a statistically signi\uc1\u64257Xcant}\par\pard\li440\ri0\sl
-226\slmult0 \fs18\cf0\f0\charscalex100 {adverse effect on the stock price. They
f}\fs18\cf0\f0\charscalex100 {ound statistically signi\uc1\u64257Xcant evidence
}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {that the materia
l damage to the \uc1\u64257Xrm value exceeded the amount of actual}\par\pard\li4
40\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {operational loss, which in tur
n implies that there is reputational damage to}\par\pard\li440\ri0\sl-240\slmult
0 \fs18\cf0\f0\charscalex100 {the \uc1\u64257Xrm due to an announcement of a lar
ge operational loss. Furthermore,}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f
0\charscalex100 {they showed that \uc1\u64257Xrms with stronger growth opportuni
ties suffer greater}\par\pard\li440\ri0\sl-226\slmult0 \fs20\cf0\f0\charscalex10
0 {losses in the market value due to operational loss announcements.}\par\pard\l
i800\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {In a similar study, Perry an
d de Fontnouvelle (2005) measure the}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf
0\f0\charscalex100 {reputational consequences of operational loss announcements
on the value}\par\pard\li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {of a
bank. Their study revealed that announcements of operational losses}\par\pard\l
i440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {of all loss types resulted i
n a statistically signi\uc1\u64257Xcant decline in the \uc1\u64257Xrm\uc1\u8217X
s}\par\pard\li440\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {market value. F
urthermore, for internal fraud events, the announcements}\par\pard\li440\ri0\sl240\slmult0 \fs18\cf0\f0\charscalex100 {resulted in a material loss amount that
}\fs18\cf0\f0\charscalex100 {is, on average, three times larger}\par\pard\li440\
ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {than the initial operational loss
that was announced. This means that, on}\par\pard\li440\ri0\sl-240\slmult0 \fs1
8\cf0\f0\charscalex100 {average, the market capitalization of a bank that makes
an internal fraud}\par\pard\li440\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100
{announcement is reduced by three times its announced loss. They also}\par\pard\
li440\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {showed that the market reac
ts more to internal fraud events for banks with}\par\pard\li440\ri0\sl-240\slmul
t0 \fs20\cf0\f0\charscalex100 {strong shareholder rights than for }\fs20\cf0\f0\
charscalex100 {banks with weak shareholder rights.}\par\pard\li440\ri0\sl-213\sl
mult0 \fs18\cf0\par\pard\li440\ri0\sl-360\slmult0 \fs10\cf0\f0\charscalex100 {26
}\fs16\cf0\f0\charscalex100 {Related studies include Palmrose, Richardson, and S
choltz (2004), Karpoff and}\par\pard\li440\ri0\sl-213\slmult0 \fs18\cf0\f0\chars
calex100 {Lott (1993), and Murphy, Shrieves, and Tibbs (2004).}\par\pard\sect\se
ctd\sbknone\pgwsxn8640\pghsxn12960\marglsxn666\margrsxn133\pard\sect\sectd\sbkpa
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}}}}\pgwsxn8640\pghsxn12960\marglsxn666\margrsxn133\margtsxn666\margbsxn160\pard
\li5213\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li5213\ri0\sl-213\slmult0 \fs18\cf
0\par\pard\li5213\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li5213\ri0\sl-213\slmult
0 \fs18\cf0\par\pard\li5213\ri0\sl-653\slmult0 \fs26\cf2\f0\charscalex100 {CHAPT
ER}{ }\fs74\cf0\f0\charscalex100 {3}\par\pard\li3000\ri0\sl-213\slmult0 \fs18\cf
0\par\pard\li3000\ri0\sl-440\slmult0 \fs44\cf0\f0\charscalex100 {Basel II Capita
l Accord}\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-213\
slmult0 \fs18\cf0\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0
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l0\trpaddr0\trpaddfl3\trpaddfr3 \clvertalt\clbrdrt\brdrnone\clbrdrl\brdrnone\clb
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\clpadr0\clpadft3\clpadfr3\cellx1200 \pard\li0\ri0\sl-680\widctlpar\intbl \fs44\
cf0\f0\charscalex100 {I}\cell\clvertalt\clbrdrt\brdrnone\clbrdrl\brdrnone\clbrdr
b\brdrnone\clbrdrr\brdrnone\cltxlrtb\clNoWrap\clftsWidth3\clwWidth6426\clpadt0\c
lpadr0\clpadft3\clpadfr3\cellx7546 \pard\li0\ri0\sl-400\widctlpar\intbl \fs18\cf
0\f0\charscalex100 {n this chapter, we review the capital requirements under the
recent Basel}\par\pard\li0\ri0\sl-240\widctlpar\intbl \fs18\cf0\f0\charscalex10
0 {Capital Accord as set out in its \uc1\u64257Xnal version of June 2006. We foc
us on}\cell\row}\pard\li413\ri0\sl-200\slmult0 \fs20\cf0\f0\charscalex100 {the a
spects relevant to operational risk.}\par\pard\li426\ri0\sl-213\slmult0 \fs18\cf
0\par\pard\li426\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li426\ri0\sl-240\slmult0
\fs18\cf0\f0\charscalex100 {THE BASEL COMMITTEE ON BANKING SUPERVISION}\par\pard
\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-280\slmult0 \fs18\cf0\
f0\charscalex100 {The Basel Committee on Banking Supervision (BCBS) is the key p
layer in}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {the \uc1
\u64257Xnancial risk regulation network, setting risk management regulations}\pa
r\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {to \uc1\u64257Xnanci
al institutions worldwide. BCBS is a committee of banking super-}\par\pard\li413
\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {visory authorities, established
in }\fs18\cf0\f0\charscalex100 {1975 by the central bank governors of}\par\pard\
li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {the Group of Ten (G10) coun
tries. Cons}\fs18\cf0\f0\charscalex100 {isting of representatives from 13}\par\p
ard\li413\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {countries (Belgium, Can
ada, France, Germany, Italy, Japan, Luxembourg,}\par\pard\li413\ri0\sl-240\slmul
t0 \fs18\cf0\f0\charscalex100 {the Netherlands, Spain, Sweden, Switzerland, the
United Kingdom, and}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex10
0 {the United States), it holds regular meetings at the Bank for International}\
par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {Settlements (BIS)
in Basel, Switzerland, where its permanent Secretariat is}\par\pard\li413\ri0\sl
-240\slmult0 \fs20\cf0\f0\charscalex100 {located.}\par\pard\li773\ri0\sl-240\slm
ult0 \fs18\cf0\f0\charscalex100 {BCBS plays the leading role in establishing ris
k assessment and man-}\par\pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex
100 {agement guidelines for banks. The current (2004) Basel Capital Accord}\par\
pard\li413\ri0\sl-240\slmult0 \fs18\cf0\f0\charscalex100 {targets credit, market
, and operational risks. A number of subcommittees}\par\pard\li413\ri0\sl-240\sl
mult0 \fs18\cf0\f0\charscalex100 {have been established to promote cons}\fs18\cf
0\f0\charscalex100 {istency in its implementation. Major}\par\pard\li413\ri0\sl240\slmult0 \fs20\cf0\f0\charscalex100 {subcommittees include the following:}{\s
uper \fs14\up3\cf0\f0\charscalex100 {1}}\par\pard\li586\ri0\sl-213\slmult0 \fs18
\cf0\par\pard\li586\ri0\sl-253\slmult0 \*\tx773\*\tx1226\*\tx4160\fs10\cf1\f0\ch
arscalex100 {\uc1\u9632X}\tab \fs18\cf0\f0\charscalex100 {The}\tab \fs18\cf0\f0\

charscalex100\i {Accord Implementation Group}\i0 \tab \fs18\cf0\f0\charscalex100
{(AIG) is aimed at promoting}\par\pard\li773\ri0\sl-240\slmult0 \fs18\cf0\f0\ch
arscalex100 {exchange of information on the practical implementation challenges}
\par\pard\li773\ri0\sl-226\slmult0 \fs18\cf0\f0\charscalex100 {of the Capital Ac
cord and on the strategies they are using to address}\par\pard\li773\ri0\sl-240\
slmult0 \fs18\cf0\f0\charscalex100 {these issues. The Operational Risk subgroup
of AIG (AIGOR) focuses}\par\pard\li773\ri0\sl-240\slmult0 \fs20\cf0\f0\charscale
x100 {on operational risk.}\par\pard\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard
\li413\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li413\ri0\sl-240\slmult0 \fs12\cf0\
f0\charscalex100 {1}\fs18\cf0\f0\charscalex100 {These descriptions of the subcom
mittees are due to BCBS.}\par\pard\li6666\ri0\sl-213\slmult0 \fs18\cf0\par\pard\
li6666\ri0\sl-213\slmult0 \fs18\cf0\par\pard\li6666\ri0\sl-293\slmult0 \fs20\cf0
\f0\charscalex100 {35}\par}

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