Operational RiskChapter 20
Operational Risk Chapter 20
Definition of Operational Risk"Operational risk is the risk of loss resultingfrom inadequate or failed internalprocesses, people, and systems, or fromexternaleventsBasel Committee Jan 2001
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
WhatItIncludesThe definition includes people riskstechnology and processing risks, physicalrisks,legal risks,etcThe definition excludes reputation risk andstrategicrisk
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
Regulatory Capital (page 431) In Basel Il there is a capital charge forOperational RiskThree alternatives:Basic Indicator (15% of annual gross income)Standardized (different percentage for eachbusiness line)Advanced Measurement Approach (AMA)
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)
Categorization of Business Lines Corporate financeTrading and salesRetail bankingCommercial banking Payment and settlementAgency servicesAsset managementRetail brokerage
Categorization of Business Lines ⚫ Corporate finance ⚫ Trading and sales ⚫ Retail banking ⚫ Commercial banking ⚫ Payment and settlement ⚫ Agency services ⚫ Asset management ⚫ Retail brokerage