Chapter OneOpRisk in Perspective

1.1 Brief History

Operational risk (OpRisk) is the youngest of the three major risk branches, the others being market and credit risks. The term OpRisk started to be used after the Barings event in 1995, when a rogue trader caused the collapse of a venerable institution by placing bets in the Asian markets and keeping these contracts out of sight of management. At the time, these losses could be classified neither as market nor as credit risks and the term OpRisk started to be used in the industry to define situations where such losses could arise. It took quite some time until this definition was abandoned and a proper definition was established for OpRisk. In these early days, OpRisk had a negative definition as “every risk that is not market and credit”, which was not very helpful to assess and manage this risk. Looking back at the history of risk management research, we observe that early academics found the same issue of classifying risk in general, as Crockford (1982) noticed: “Research into risk management immediately encounters some basic problems of definition. There is still no general agreement on where the boundaries of the subject lie, and a satisfactory definition of risk management is notoriously difficult to formulate”.

Before delving into the brief history of OpRisk it might be useful to first understand how risk management is evolving and where OpRisk fits in this evolution. Risk in general is a relatively new area that began ...

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