White Papers for Basel II Capital Accord (Basel II)

The potential impact of explicit Basel II operational risk capital charges on the competitive environment of processing banks in the United States

Federal Reserve Bank of Boston

Basel II replaces Basel I’s implicit capital charge on operational risk with an
explicit charge. Certain U.S. banks concentrated in processing-related business lines –
which have significant operational risk – could thus face an increase in overall minimum
regulatory capital requirements. Some have argued that, as a result, these so-called
“processing banks” would be disadvantaged vis-à-vis competitors not subject to
regulatory capital requirements for operational risk.
This paper evaluates these concerns. To do so, we first describe the five markets
where processing banks have concentrated their activities: securities custody,
institutional asset management, mutual fund management, private wealth management,
and general processing. Second, we investigate whether the major competitors in each
market are expected to be subject to regulatory capital requirements for operational risk.
Third, we consider whether the processing banks would actually need to raise capital to
accommodate the new operational risk charge.

View the White Paper

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