Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation

CHAPTER 13

Operational Risk Management: An Emergent Industry

Kimberly D. Krawiec

 

 

ABSTRACT

Financial institutions have always been exposed to operational risk—the risk of loss from faulty internal controls, human error or misconduct, external events, or legal liability. Only in the past decade, however, has operational risk risen to claim a central role in risk management within financial institutions, taking its place alongside market and credit risk as a hazard that financial institutions, regulators, and academics seriously study, model, and attempt to control and quantify. This chapter situates operational risk management—particularly those components of operational risk related to legal risk and the risk of loss from employee misconduct—within the broader literature on enforced self-regulation, internal controls, and compliance, arguing that the increased focus on operational risk management portends both positive and negative effects.

13.1 INTRODUCTION

Financial institutions have always been exposed to operational risk—the risk of loss from faulty internal controls, human error or misconduct, external events, or legal liability. Only in the past decade, however, has operational risk risen to claim a central role in risk management within financial institutions, taking its place alongside market and credit risk as a hazard that financial institutions, regulators, and academics seriously study, model, and attempt to control and quantify. This newfound prominence is ...