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

Abstract

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-a-vis competitors not subject to regulatory capital requirements for operational risk. This paper evaluates these concerns.