Why an Op Risk capital charge is dangerous and won’t work

The operational risk capital charge proposed under the Basel II banking accord is fundamentally flawed, and could have unintended and highly undesirable consequences, argues Karen Shaw Petrou.

As a physics undergraduate, one was taught that any equation that required more than three blackboards was probably wrong, with the simple elegance of Newton’s and Einstein’s equations set in sharp contrast to our lengthy efforts in the lecture hall.

Reading the Basel II bank capital adequacy proposals brings to mind that early lesson in the hazards of over-complex solutions that create unintended problems.

The goal of aligning real risk more closely with regulatory capital standards is