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The Journal of Derivatives

The Journal of Derivatives

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Primary Article

Insuring versus Self-Insuring Operational Risk

Viewpoints of Depositors and Shareholders

Michel G Crouhy, Dan Galai and Robert Mark
The Journal of Derivatives Winter 2004, 12 (2) 51-55; DOI: https://doi.org/10.3905/jod.2004.450968
Michel G Crouhy
Head of research and development at IXIS Corporate & Investment Bank in Paris.
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  • For correspondence: mcrouhy@ixis-cib.com
Dan Galai
The Abe Gray professor at the Hebrew University and a principal of Sigma P.C.M. in Jerusalem, Israel.
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Robert Mark
Chief executive officer of Black Diamond Inc. in La Fayette, CA.
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Abstract

Procedures for measuring exposure to market risk, and for allocating risk capital against it, have been put into place by banking authorities in Europe and the U.S. The next stage of the process, embodied in Basel II, brings operational risk into consideration as well. Although there is no reward in the form of higher returns from bearing operational risk, reducing it does entail increased costs, either in the form of more extensive and expensive internal controls, or as explicit protection purchased from outside insurers. This raises the familiar problem of conflict of interest between management, acting on behalf of a bank's shareholders, and the ‘debtholders,’ in this case the depositors, and/or the deposit insurance authority. This short article illustrates, in a simple example, the conflict of interest in mitigating operational risk within a bank.

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The Journal of Derivatives
Vol. 12, Issue 2
Winter 2004
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Insuring versus Self-Insuring Operational Risk
Michel G Crouhy, Dan Galai, Robert Mark
The Journal of Derivatives Nov 2004, 12 (2) 51-55; DOI: 10.3905/jod.2004.450968

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Insuring versus Self-Insuring Operational Risk
Michel G Crouhy, Dan Galai, Robert Mark
The Journal of Derivatives Nov 2004, 12 (2) 51-55; DOI: 10.3905/jod.2004.450968
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