Financial Resilience
- Anthony Peccia
- Oct 17, 2024
- 1 min read
The CRO calls you into a meeting and opens the meeting with, “ good thing TD had set aside CAD 7.12 B in capital for op risk, they can easily absorb this fine and have roughly 3.5 billion leftover.
I am not sure we have the same capacity to absorb such a loss even accounting for our smaller size. Our CFO thinks it is not enough and thinks we need to increase our capital for op risk. I scheduled to make the case to the RC next week to either keep the capital level the same, increase it, or perhaps unlikely, even reduce the capital because we are over-capitalized.
Provide me with the analysis that allows us to conclude which one of these options to recommend for approval at the RC.
Prepare your analysis and recommendations for your meeting next Wednesday with the CRO to discuss your recommendations.
Have we conducted comprehensive stress testing to evaluate how our operational risk capital would hold up under different crisis scenarios, such as regulatory fines, cyberattacks, or large fraud events? Should we adjust our operational risk capital strategy in light of potential regulatory changes, such as the suggested phasing out of the AMA by the Basel Committee?
Aside from the financial implications, how might the decision on operational risk capital be perceived by regulators or other stakeholders? Could maintaining or reducing capital send the wrong signal?
The case highlights the challenges of choosing the most appropriate method for calculating operational risk capital. While SMA results in a lower capital requirement, there’s a risk of underestimating future losses if the historical data doesn’t capture all potential risks. Should Meridian Bank consider adopting a more conservative approach, such as adding an internal buffer, to ensure financial resilience in the face of emerging risks like cybersecurity threats or regulatory changes? How can we ensure that our risk models remain flexible enough to account for these evolving risks?
The Meridian Bank team effectively explored different methods to determine the appropriate operational risk capital. How does the inclusion of an internal capital beyond the SMA requirement benefit Meridian Bank in terms of risk management, and what are the potential negative impact of holding excess capital compared to the regulatory minimum?
It is great to learn about the four different methods of calculating the capital charge and their related drawbacks. One key takeaway is that assuming the industry average level is one of the most significant drawbacks for the BIA, TSA, and AMA methods