Operational risks are present in virtually all bank transactions and activities and are a major concern of bank supervisors, regulators, and bank management. Failing to understand operational risk increases the likelihood that risks will go unrecognized and uncontrolled, resulting in potentially devastating losses for the bank.
- 7.1 What Is Operational Risk?
- 7.2 Operational Risk Events
- 7.3 Operational Loss Events
- 7.4 Operational Risk Management
- 7.5 Basel II and Operational Risk
Key Learning Points
- Operational risks are inherent in business and reflect losses from inadequate or failed internal processes, systems, human error, or external events.
- The Basel II Accord identifies five different operational risk events: internal process risk, people risk, legal risk, external risk, and systems risk. These risks are interrelated.
- Operational risk events are characterized by their frequency and impact on the operations of the bank. Banks focus their operational risk management on high-frequency/low-impact risks and low-frequency/high-impact risks.
- Operational risk inventory that collects information on operational risk events can be either top-down or bottom-up.
- The Basel II Accord provides three different approaches to calculate operational risk capital: the Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach.