Nº 20-55: Basel II and Operational Risk

In a setting where private information goes public for the first time, we study the real effects of the Basel II Accord requiring banks to calculate operational risk capital, and disclose qualitative and quantitative information. Using a difference-in-differences setup featuring partial US implementation relative to full EU adoption, we find that the introduction of operational risk regulation resulted in a significant reduction in operational losses in treated EU banks. This effect, concentrated in internal losses and present in banks subject to supervisory approval, supports the idea that capital adequacy, supervisory review, and market discipline operate effectively on a complementary basis.