Tipology : Glossary

Operational risk is defined as: "the risk of losses resulting from inadequate or failed internal processes, human actions and systems or from external events". This definition has been given by the New Basel Accord on capital adequacy (Basel III - International regularory framework for banks), which has included in the minimum regulatory capital charge for operational risk to provide banks with a sufficient degree of protection, and to give an incentive for innovation and development of sound operational Risk management.

Indeed, following the gradual deregulation and globalisation in the banking and financial sector, supervisors and the banking industry have recognized the importance of operational risk in measuring the risk profiles of financial institutions. In particular, there is a wide variety of sources of operational risks. These are generally identified in the use of more highly automated technology, the spread of e-commerce, large-scale mergers and acquisitions supported by integrated systems, the expansion of banks that have become very large-volume service providers, and the intensification of the use of financing techniques.

Historically, banks have relied on internal control mechanisms to prevent some categories of operational risks such as frauds, telecommunication problems, misuse of confidential customer information, and improper trading activities on the bank’s account. Successively, following the evolution of the banking sector and in line with the international principles and guidelines provided by the Basel Committee On Banking Supervision (BCSB), new practices have been introduced. As a result, operational risk management has been gradually transformed in a comprehensive practice comparable to the management of credit and market risk.

Bibliography
BASEL COMMITTEE ON BANKING SUPERVISION (2003), Sound Practices for the Management and Supervision of Operational Risk, February 2003.

Editor: Bianca GIANNINI
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