As they have begun to achieve this goal for credit and market risks, regulators have started to worry that not enough capital will be left over to cover the banking system against all its other risks. But the idea of a specific capital charge for these risks has proved controversial in the banking industry. But two key issues are undecided. One is whether the Basle Committee will choose to take a narrow or a broad definition of the risks other than market and credit risk that they ask banks to reserve capital against. The other is how it will decide to quantify these risks for the purposes of calculating a capital charge.
Many bankers argue that including risks such as reputational risk also makes little sense.
The banking industry in general takes the view that such risks cannot be realistically quantified, and that in any case it is not the business of regulators to protect banks from making bad business decisions. It seems possible that the Basle Committee will accept this definition of operational risk. If this does happen, it will concern many in the industry who would view the buffer charge as a blunt instrument which cannot accurately reflect the different levels of risk entailed in different business decisions. At the time of writing, it seems likely that the Basle Committee is going to base its charge on some estimate of the operational risks that a bank is running. This might be a simple benchmark of some kind, such as non-interest expenses, though banks might also be given the option of a more complex formula for business line risk estimation.