Estimating the Regulatory Capital for Operational Risk Using Basel Approaches | ||
| المجلة الدولية للعلوم الإدارية والاقتصادية والمالية | ||
| Volume 4, Issue 12, January 2025, Pages 1-32 PDF (634.25 K) | ||
| Document Type: المقالات العلمية. | ||
| DOI: 10.21608/ijaefs.2024.336966.1045 | ||
| Author | ||
| Salah Ahmed Oraby oraby* | ||
| Saudi Electronic University | ||
| Abstract | ||
| The study aimed to quantify the regulatory capital for the loan portfolio’s operational risks, using Basel Committee approaches for a leading bank as a case study of Saudi Arabia.The study used the statistical programming language R to identify the regulatory capital using a model based on loss distribution. The results indicated that the standardized income-based approach generated the lowest regulatory capital because it used a beta of 12% of the 3-year average total income. However, the model based on loss allocation under the advanced measurement method generated the largest regulatory operational risk capital for the credit portfolio at a confidence level of 99.9%. On the other hand, the income-based approach generated regulatory capital with a beta of 15% of the 3-year average gross income less than the capital estimated by the loss distribution-based model. The study's results confirmed that the regulatory capital estimated by income-based methods was less than the real exposure to operational risks estimated by the model using the distribution of losses. The results of the present study will be useful to regulatory authorities, bank managers, and investors in measuring operational risk. The present study contributes to the literature on estimating and comparing regulatory capital for operational risk. However, we expect banks to stop relying on Basel Committee income-based approaches, assuming one size fits all. The results indicate that these methods underestimate the regulatory capital's assessment of the bank's operational risk under this study. In addition, the results of the current study can help academics and practitioners use real operational risk indicators rather than proxies such as cost-to-income ratios and operating expenses. | ||
| Keywords | ||
| Basel Committee; Value at Risk; Regulatory Capital; Confidence Level | ||
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