Good Practices to Manage Operational Risk in Financial Institutions
AbstractThe Basel Committee on Banking Supervision (BCBS) defined operational risk (OR) as the risk of losses resulting from the inadequacy or failures in the internal processes, people and systems, or from external events. This definition includes the legal risk but excludes strategic and reputational risk. Traditionally, individual ORs management has been an important part of banks’ efforts to prevent fraud and keep the integrity of internal controls, among other aspects. However, a relatively new approach considers operational risk management as a comprehensive practice comparable to the management of other risks (such as credit or market risk). At the same time, it measures the losses deriving from OR events and requires regulatory capital to face such events. Since operational risk has consolidated as a comprehensive risk category, the BCBS has issued a series of internationally-accepted principles or good practices for OR management and supervision in financial entities. This document analyzes these best practices and their application to international banks’ structures. Likewise, the paper analyzes the regulations of a sample of Latin American countries that have issued standards on good practices related to this topic. It is worth mentioning that the main countries of the region have created a regulatory framework tending to implement OR management structures in financial institutions based on the recommendations and principles of the BCBS.
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Bibliographic InfoArticle provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.
Volume (Year): 1 (2007)
Issue (Month): 47 (April - June)
banking supervision; banks; Basel Committee on Banking Supervision; operational risk; risk management;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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