Operational risk and regulatory capital: do public and private banks differ?

Tarika Singh Sikarwar; Harshita Mathur; Vandana Lothi

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We determine the relationship between operational risk and regulatory capital in Indian public and private banks.
Our findings suggest that there is a one-way relationship between operational risk and regulatory capital, with operational risk causing variations in Capital Adequacy ratio in public banks.
There is no evidence of an inverse association between regulatory capital and operational risk in case of public banks.
No relationship between operational risk and regulatory capital is found in the case of private banks.

Abstract

In financial institutions, operational risk is viewed as a serious risk as it can have a considerable effect on profitability. The primary objective of this research is to discover methods of quantifying operational risk and regulatory capital in financial institutions, as well as any interrelationships between them. The research is based on a sample of public and private sector banks. The study demonstrates the capability of certain public sector banks to bear operational risk on a particular level of regulatory capital. The ability of a bank to be successful under unfavorable conditions is related to its operational risk, regulatory capital and management processes.

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