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

Foreword

This is an important book, and it is published at just the right time. I have accepted with great pleasure the invitation to write the Foreword for Greg Gregoriou’s new volume on operational risk, but I had not anticipated that it would allow me to reflect on the concurrent unfolding of the disastrous September events. As one financial institution after another is failing or is subjected to an emergency sale, we start to comprehend that the basic rules of banking are in the process of being fundamentally redefined. A significant fallout for the real economy is by now more than likely, and the resulting political tremors will have a potentially decisive impact on the November elections. The reported loss figures are staggering and of almost incomprehensive magnitude for the average citizen. The rescue of the German IKB has, for instance, led to accumulated losses of 9 billion euros so far, an amount that is equivalent to an extra burden of approximately 300 euros for every taxpayer. Hundreds of billions of dollars need to be committed as part of the U.S. government’s bailout program, translating into a still-unknown cost for the U.S. taxpayer.

While the crisis is clearly of a systemic nature, its ultimate source lies with the notoriously myopic behavior of the banking community and, as some commentators have argued, is the outcome of collective greed. Bankers have increasingly viewed their careers as long call options that, in the worst case, could force them into a lengthy ...