RT Journal Article
SR Electronic
T1 Insuring versus Self-Insuring Operational Risk
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 51
OP 55
DO 10.3905/jod.2004.450968
VO 12
IS 2
A1 Michel G Crouhy
A1 Dan Galai
A1 Robert Mark
YR 2004
UL https://pm-research.com/content/12/2/51.abstract
AB Procedures for measuring exposure to market risk, and for allocating risk capital against it, have been put into place by banking authorities in Europe and the U.S. The next stage of the process, embodied in Basel II, brings operational risk into consideration as well. Although there is no reward in the form of higher returns from bearing operational risk, reducing it does entail increased costs, either in the form of more extensive and expensive internal controls, or as explicit protection purchased from outside insurers. This raises the familiar problem of conflict of interest between management, acting on behalf of a bank's shareholders, and the ‘debtholders,’ in this case the depositors, and/or the deposit insurance authority. This short article illustrates, in a simple example, the conflict of interest in mitigating operational risk within a bank.