(An Autonomous Apex Institute Established by RBI & Banks)
(An Autonomous Apex Institute Established by RBI & Banks)
Bank regulators in different countries have responded variedly to failures of digital technologies and systems in banks under their jurisdiction. Some have prescribed higher capital while others have levied fines and penalties, or issued warnings and reprimands. This study examines whether imposition of higher capital could prompt appropriate mitigation action in banks. Technological malfunctions and breakdowns are operational risk events, classified as business disruption and systems failure, which have lower frequency of occurrence as well as lower severity of impact. Their material insignificance leads to their acceptance as part of business risk. With banks transitioning to digital mode of operations, such risks may be higher, but capital charge imposition may have limited direct impact on their mitigation. Instead, by imposing penalties, regulators may elicit mitigation actions such as investment on technology capacity and enhanced controls. The study finds that regulatory penalties lead to lower operational risk capital with lag of one year and therefore may be better alternative action.
https://www.inderscienceonline.com/doi/abs/10.1504/IJEBANK.2024.136823