Magazine article American Banker

In Survey, Basel Tries to Quantify Operational Risk

Magazine article American Banker

In Survey, Basel Tries to Quantify Operational Risk

Article excerpt

A survey conducted by international regulators has found that retail and commercial banking operations are the source of more than 60% of operational risk-related losses suffered by large institutions.

The Basel Committee on Banking Supervision on Monday released the results of the survey, which was meant to measure the frequency and cost of operational risk-related losses at internationally active banks.

The committee, which is in the process of rewriting international bank capital rules, has decided that banks should hold capital to protect themselves from operational risk, which it defines as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events."

Industry officials have loudly opposed the idea of including an operational risk element in banks' overall regulatory capital charge. Many critics say there is no way to accurately measure operational risk exposures, and therefore no accurate way to set capital requirements.

For their part, regulators have been adamant about retaining the operational risk component, and the survey appears to be the beginning of an effort to answer the critics with quantitative data.

The survey asked 30 banks in 11 countries to identify their operational risk-related losses from 1998 through 2000, and to classify them by cost, event type, and business line in which they occurred.

The number of loss events reported suggests that retail banking is far and away the most susceptible business line -- it accounted for 67. …

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