Abstract

Basel II simultaneously introduced a regulatory framework for operational risk and shifted the regulatory focus from top-down to bottom-up governance, prompting increased reliance on self-evaluation and market discipline. In this paper we assess the relevance of market discipline to regulation of operational risk and the implications of voluntary disclosure. We study the development, determinants and quality of operational risk disclosure in the Nordic banking sector following the implementation of Basel II. Our results reveal that the extent of disclosure has increased and that size is the main determinant. However, the quality of operational risk disclosure is poor and it does not assist stakeholders' evaluation of banks' operational risk. Based on our results, we discuss whether disclosure studies can capture quality in terms of content, the impact of regulation on banks of different sizes and whether market discipline is an effective regulatory effort to reduce bank risk.