Operational Risk: A Practitioner's View
Journal of Risk, Vol. 5, No. 3, pp. 1-16, 2003
15 Pages Posted: 18 Nov 2002 Last revised: 15 Feb 2011
There are 2 versions of this paper
Operational Risk: A Practitioner's View
Operational Risk: A Practitioner's View
Date Written: October 11, 2002
Abstract
The Basel Committee on Banking Supervision ("the Committee") released a consultative document that included a regulatory capital charge for operational risk. Since the release of the document, the complexity of the concept of "operational risk" has led to vigorous and recurring discussions. We show that for a production unit of a bank with well-defined workflows operational risk can be unambiguously defined and modelled. The results of this modelling exercise are relevant for the implementation of a risk management framework, and the pertinent risk factors can be identified. We emphasize that only a small share of all workflows make a significant contribution to the resulting VaR. This result is quite robust under stress testing. Since the definition and maintenance of processes is very costly, this last result is of major practical importance. Finally, the approach allows us to distinguish features of quality and risk management respectively.
Keywords: Operational Risk, Risk Management, VaR
JEL Classification: C19, C69, G18, G21
Suggested Citation: Suggested Citation
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