Title: Does higher capital help to mitigate failure of digital technologies and systems in banks?

Authors: Anjan Roy

Addresses: National Institute of Bank Management, Kondhwa Khurd, Pune 411048, Maharashtra, India

Abstract: 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.

Keywords: operational risk; loss distribution; digital technologies; regulatory penalties; business disruption; system failure.

DOI: 10.1504/IJEBANK.2024.136823

International Journal of Electronic Banking, 2024 Vol.4 No.2, pp.85 - 98

Received: 17 Jan 2023
Accepted: 18 Jun 2023
Published online: 22 Feb 2024 *

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