Economic Capital Gauged

University of Cambridge Judge Institute of Management Working Paper No. 07/2004

42 Pages Posted: 27 Dec 2004

See all articles by Pia E. K. Berg-Yuen

Pia E. K. Berg-Yuen

University of Cambridge - Judge Business School

Elena Medova

University of Cambridge - Centre for Financial Research; Cambridge Systems Associates Limited

Date Written: June 2004

Abstract

The Basel Committee's release of the new Basel Accord and its new operational risk class are raising questions on how regulatory capital for operational risk should be determined and is transforming the banks' view of economic capital. This paper investigates the relationship between publicly available economic capital - and regulatory capital figures from 2002 and 2003, and compares these with figures from the Basel Committee's Quantitative Impact Studies. The focus will be constrained to top 50 internationally active banks. Initially, many if not most banks will be using the simplest regulatory method, the Basic Indicator Approach, to calculate the operational risk capital charge. Hence, the Basic Indicator Approach is applied in order to study the impact of different definitions of gross income resulting in different levels of operational risk capital charges. Finally, the comprehensiveness of year-end economic capital disclosure in 2002 and 2003 annual reports of the top 50 banks is examined to reflect the considerable evolutionary change that the banking industry is undergoing.

Keywords: Economic capital, risk capital, regulatory capital, capital charge, operational risk

JEL Classification: C44, G21, M00

Suggested Citation

Berg-Yuen, Pia E. K. and Medova, Elena, Economic Capital Gauged (June 2004). University of Cambridge Judge Institute of Management Working Paper No. 07/2004, Available at SSRN: https://ssrn.com/abstract=633983 or http://dx.doi.org/10.2139/ssrn.633983

Pia E. K. Berg-Yuen (Contact Author)

University of Cambridge - Judge Business School ( email )

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Cambridge, CB2 1AG
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HOME PAGE: http://www.jims.cam.ac.uk

Elena Medova

University of Cambridge - Centre for Financial Research ( email )

Centre for Mathematical Sciences
Wilberforce Road
Cambridge, CB3 0WA
United Kingdom

Cambridge Systems Associates Limited ( email )

5-7 Portugal Place
Cambridge, CB5 8AF
United Kingdom

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