Time for some fine-tuning
One of the biggest talking points in the Basel accord is the proposed charge for operational risk. But devising a system for monitoring and measuring operational risk that is subject to external review presents quite a challenge.
One of the biggest talking points in the Basel document is the proposed charge for operational risk. This broad concept is usually defined as the risk of losses stemming from processes, systems, external events and human failure. That seems to cover just about every loss known to humanity, so it is no easy matter to measure - let alone manage - operational risk.
But perhaps surprisingly, a number of banks have already put into place methods for quantifying this risk and set aside capital to cover it. "Some banks are allocating an element of capital for operational risk," says PricewaterhouseCoopers partner John Tattersall. "But their systems for measuring losses and anticipating amounts at risk tend not to be very robust. Devising a system for monitoring and measuring operational risk that is subject to external review will be quite a challenge."
The proposals explain how the basic operational risk charge will work.