Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

12.4 Operational Risk

Over the past few years there has been an explosion of research and development in operational risk measurement. To some extent, this has been driven by regulatory demands. Basel II included a charge for operational risk in calculating regulatory capital (see Basel Committee on Banking Supervision 2006 [originally published in 2004] and 2011 [originally published 2003]). The industry has also recognized the benefits of better management of operational risk—many of the trading losses discussed in Chapter 4 were directly or indirectly related to operational failures.

The mathematical sophistication of the field has grown substantially, aided by transfer of knowledge and techniques from the actuarial models applied to nonlife insurance. We need to remember, however, that the end goal is the management of risk. This is true for all areas of risk management but is particularly true for operational risk management. The mathematical modeling is important and there have been and there will be further strides going forward, but the modeling is only part of the overall management of operational risk.

And there are indeed real business benefits to operational risk management. More than one author claims that “operational risk has no upside for a bank” (McNeil, Frey, and Embrechts 2005, 464) or that “operational risk can only generate losses” (Jorion 2007, 497). This is not the case. To quote Blunden and Thirlwell (2010):

Operational risk management is not just about ...