After studying this chapter, you should be able to:
1 Understand the evolution of operational risk management regulation and the four general components of an operational risk management framework
2 Understand the process of effective operational risk management and the five broad steps involved
3 Outline the best practice principles that underpin an effective operational risk management framework
4 Understand the different impacts of low and high frequency events and some initial strategies that may be universally applicable
Having broadly defined operational risk, its causes, and approaches to manage it, this chapter begins to delve deeper into the operational risk management process by discussing operational risk management frameworks and considering the regulatory backbone behind them.
This chapter starts by discussing the broad steps in the process, which include defining scope and objectives, identifying and assessing risks, mitigating and controlling risks, and monitoring and reporting. We then break down these steps into their component parts and start peeling the layers and considering best practices in their implementation.
Although later chapters will explore these concepts at greater length, here we will lay the foundations upon which operational risk managers can build a management framework for operational risk and how this framework fits into the operations of a bank or AI.