Operational Risk Management Under Basel Ii: The Case of the Spanish Financial Services

22 Pages Posted: 2 Mar 2005

See all articles by Ana Fernández Laviada

Ana Fernández Laviada

University of Cantabria - Department of Economics

Francisco J. Martinez Garcia

University of Cantabria - Department of Economics

Francisco M. Somohano

University of Cantabria

Date Written: March 1, 2005

Abstract

Operational Risk (OR) is "the risk of losses resulting from inadequate or failed internal processes, people and systems, and external events". Although it is not new, its control and management have acquired increased importance for financial institutions to remain competitive. A new vision for Operational Risk Management (ORM) is emerging due to new regulatory and management requirements.

Basel II, the New Capital Accord finally approved by the Basel Committee on Banking Supervision on June 26, 2004, includes a regulatory capital charge for OR. The accord offers different management-oriented alternative methodologies to quantify capital. The more sophisticated the methodology, the lower the capital charge. This means that OR should be adequately managed in order to assume lower levels of capital.

In this context, banks try to develop an effective ORM framework that allows them to identify, assess, monitor, report, control and mitigate their OR.

Currently, our research focuses on the definition of the elements that constitute an effective ORM framework in financial institutions. With this end in view, we take as a theoretical and conceptual model the one proposed by the AS/NZS 4360 Australian standard, which was updated in 2004. We apply this model to ORM by reviewing and analysing world-wide best practices, regulations and proposals published by regulators and experts on the subject.

To analyse the current situation of the Spanish financial sector and check the adapted model we surveyed the leading institutions in the industry. This paper presents the main results obtained from the questionnaire and shows the Spanish financial system has made great efforts in ORM in recent years. As a result, important progress has been achieved in very little time and it can be said, in general terms, to be on a par with the top leading international systems.

Keywords: Operational risk, financial institutions, risk management

JEL Classification: RI, BA

Suggested Citation

Fernández Laviada, Ana and Martinez Garcia, Francisco J. and Somohano, Francisco M., Operational Risk Management Under Basel Ii: The Case of the Spanish Financial Services (March 1, 2005). Available at SSRN: https://ssrn.com/abstract=676829 or http://dx.doi.org/10.2139/ssrn.676829

Ana Fernández Laviada (Contact Author)

University of Cantabria - Department of Economics ( email )

Av. Los Castros s/n
Santander 39005, Cantabria 39005
Spain

Francisco J. Martinez Garcia

University of Cantabria - Department of Economics ( email )

Av. Los Castros s/n
Santander 39005, Cantabria 39005
Spain

Francisco M. Somohano

University of Cantabria ( email )

Santander 39005 Cantabria
Spain

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