By Imad A. Moosa

ISBN-10: 0230222668

ISBN-13: 9780230222663

The e-book offers arguments which are serious of the Basel II Accord, fairly the complex dimension method of operational risk. It is argued that the complex size procedure isn't plausible by way of bills and advantages and is probably going to distract monetary associations from the genuine activity of coping with operational possibility.

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By attempting to avoid systemic risk (which arises from the effect of the failure of a single bank on the whole banking sector, the financial sector and the economy at large) in the name of creditors and investors, they end up making the financial system more unstable. Lack of profitability, he argues, represents a supervisory problem even if the underlying bank is compliant with the capital adequacy requirements and has the most sophisticated risk measurement models. Indeed he argues that “sustained, sound and diversified profitability is THE precondition for protecting creditors and avoiding systemic risks” Survival, the argument goes, is not only about capital, compliance and controls, it is also about performance.

It is, therefore, defined as the minimum amount of capital that regulators require a bank to hold. Under Basel I and Basel II, banks are required to maintain a minimum capital ratio of 8% of risk-weighted assets. de Fontnouvelle et al (2005b) point out that while Basel II retains the minimum regulatory capital concept of Basel I, the former employs principles of economic capital to make the minimum regulatory capital measure more risk-sensitive. Economic capital and regulatory capital are bound to differ, perhaps significantly, unless the regulator agrees to make regulatory capital equal to economic capital as determined by internal models.

The most recent reminder of the validity of this proposition is the failure of Northern Rock in September 2007, which has created a lot of problems for the British government and cost the tax payers billions of pounds. The collapse of the banking system in Argentina earlier this century resulted not only in economic collapse but also in civil unrest. Three issues are discussed in this section: (i) why banks are important; (ii) the justification for banking regulation; and (iii) regulatory functions.

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Quantification of Operational Risk under Basel II by Imad A. Moosa

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