Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework

CHAPTER 2

The Regulatory Push

The regulation of operational risk is globally founded on Basel II. This chapter discusses the regulatory response to the Basel Capital Accords (commonly known as Basel I and Basel II) that were presented by the Basel Banking Committee of the Bank of International Settlements in 1988 and 2004, which were intended to provide a robust capital framework and risk management approach for internationally active banks.

The focus of this chapter is on (1) the history of the Basel Accords; (2) the rules of the Basel Accords; (3) the adoption of Basel II in Europe and (4) in the United States; (5) the impact of the financial crisis and resulting European and U.S. regulatory changes, including the Dodd-Frank regulation in the United States; and, finally, (6) the future of Basel regulation and the role of operational risk management.

HISTORY OF THE BASEL ACCORDS

The Basel Accords were developed by the Bank of International Settlements (BIS), which is headquartered in Basel, Switzerland. The BIS describes its mission and activities as follows:

BIS is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks.

The BIS fulfills this mandate by acting as:

• a forum to promote discussion and policy analysis among central banks and within the international financial community
• a center for economic and monetary research
• a prime counterparty for central banks in their financial transactions
• agent ...