OperationalRiskChapter 20RiskManagementandFinanciallnstitutions3e,Chapter20,CopyrightJohnC.Hull2012
Risk Management and Financial Institutions 3e, Chapter 20, Copyright © John C. Hull 2012 Operational Risk Chapter 20 1
Definition of Operational Risk“Operational risk is the risk of lossresulting from inadequate or failed internalprocesses, people, and systems, or fromexternaleventsBaselCommitteeJan20012RiskManagementandFinancialInstitutions3e,Chapter20,CopyrightJohnC.Hull2012
Risk Management and Financial Institutions 3e, Chapter 20, Copyright © John C. Hull 2012 Definition of Operational Risk “Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events” Basel Committee Jan 2001 2
WhatItIncludes The definition includes people riskstechnology and processing risks, physicalrisks, legal risks, etcThe definition excludes reputation risk andstrategic risk3RiskManagementandFinancialInstitutions3e,Chapter20,CopyrightJohnC.Hull2012
Risk Management and Financial Institutions 3e, Chapter 20, Copyright © John C. Hull 2012 What It Includes ⚫ The definition includes people risks, technology and processing risks, physical risks, legal risks, etc ⚫ The definition excludes reputation risk and strategic risk 3
Regulatory Capital (page 431) In Basel Il there is a capital charge forOperationalRiskThree alternatives:Basic Indicator (15% of annual gross income) Standardized (different percentage for eachbusiness line)Advanced Measurement Approach (AMA)RiskManagementandFinancialInstitutions3e,Chapter20,CopyrightJohnC.Hull20124
Risk Management and Financial Institutions 3e, Chapter 20, Copyright © John C. Hull 2012 Regulatory Capital (page 431) ⚫ In Basel II there is a capital charge for Operational Risk ⚫ Three alternatives: ⚫ Basic Indicator (15% of annual gross income) ⚫ Standardized (different percentage for each business line) ⚫ Advanced Measurement Approach (AMA) 4
CategorizationofBusinessLinesCorporate financeTrading and salesRetail bankingCommercial banking Payment and settlementAgency servicesAsset managementRetail brokerage5RiskManagementandFinancialInstitutions3e,Chapter20,CopyrightJohnC.Hull2012
Risk Management and Financial Institutions 3e, Chapter 20, Copyright © John C. Hull 2012 Categorization of Business Lines ⚫ Corporate finance ⚫ Trading and sales ⚫ Retail banking ⚫ Commercial banking ⚫ Payment and settlement ⚫ Agency services ⚫ Asset management ⚫ Retail brokerage 5