Key Motifs in the Home-Host Mantra of Operational Risk Management

Journal of Operational Risk, Vol. 3, No. 4, 2008

Posted: 25 Jul 2015 Last revised: 18 Aug 2015

See all articles by Andy Yeh

Andy Yeh

Brass Ring International Density Enterprise (BRIDE)

Date Written: September 1, 2008

Abstract

This paper discusses the key policy issues around the policy implementation of the Basel advanced measurement approach (AMA) to operational risk management. These issues pertain to operational risk governance, capital measurement and allocation, and future advances in operational risk transfer. Although we assess these issues from a host supervisor's perspective, the main themes have practical implications in a broader home-host context.

In terms of operational risk governance in the host regime, the local board and senior management must take an active interest in operational risk management. Several work streams such as operational loss scenario analysis, business continuity management, and external audit or other forms of independent assurance could help reinforce this active interest. Also, the significant subsidiary of a globally active bank is expected to hold an adequate amount of capital for operational risk. At the more disaggregated level, capital allocation must create sound incentives for business lines to carry out effective operational risk management processes. This capital allocation calls for the integration of the operational risk management processes into the business-as-usual teams. Furthermore, it is important to create a robust nexus between managerial pay and operational risk-adjusted return. This nexus helps strengthen the incentives for business lines to enhance the overall quality of operational risk management over time.

Future work could shed fresh light on the treatment of diversification benefits between operational risk and other risks as part of the Pillar 2 supervisory review process. This work adds value to the internal capital adequacy assessment process (ICAAP). Also, future developments should help promote operational risk transfer via insurance contracts or derivatives. These risk products could help advance the evolution of operational risk management to a new era.

Keywords: Operational risk, Basel home-host cooperation, corporate governance, risk management, standalone capability, capital allocation, loss distribution approach (LDA), PIllar 2 internal capital adequacy assessment process (ICAAP), inter-jurisdictional diversification, insurance, derivative risk transfer

JEL Classification: G21, G38, K22, L51

Suggested Citation

Yeh, Andy, Key Motifs in the Home-Host Mantra of Operational Risk Management (September 1, 2008). Journal of Operational Risk, Vol. 3, No. 4, 2008, Available at SSRN: https://ssrn.com/abstract=2635346

Andy Yeh (Contact Author)

Brass Ring International Density Enterprise (BRIDE) ( email )

6/F, Teda Building, 87 Wing Lok Street
Sheung Wan
Hong Kong
Hong Kong

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