Bankers are trying to beat supervisors to a satisfactory definition of operational risk. That's because last June the Basel committee on banking supervision added operational risk to factors for which it proposes to charge regulatory capital. Bankers fear the committee will rush to a formula based on turnover or asset size to set a capital charge for operational risk. Size and volume isn't the issue here, they say, it's quality of management, organizational structure and systems.
But what is operational risk? The Basel committee simply refers to it as "other risks" after market and credit risk are stripped out. A survey by industry associations has come up with this definition: "Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events." - anything from a failed money transfer to Hurricane Mitch. But reaching that definition was hard: 48% of firms quizzed for the survey said they, like the Basel committee, used a negative definition. Much time was spent deciding whether or not to include general business risk, a change in EU competition law, for instance Finally business risk was excluded.
"It took four hours with 15 banks sitting round a table to reach agreement on loss categorization," said one of the sponsors, when the survey was unveiled on November 9.