Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease...

Seven desirable properties for a capital framework are proposed, and the Advanced Measurement Approach (AMA) and the new standardized approach (NSA) for operational risk capital are evaluated relative to them. The AMA is vulnerable to gaming, complex, and lacks comparability. The NSA lacks risk...