Since the mid-1990s, the topics of market risk and credit risk have been the subject of much debate and research, with the result that financial institutions have made significant progress in the identification, measurement and management of both these forms of risk.

But, events such as the September 11 terrorist attacks, rogue trading losses at Barings, AIB and National Australia Bank, and the Y2K scare serve to highlight the fact that the scope of risk management extends beyond merely market and credit risk.

The list of risks (and, more importantly, the scale of these risks) faced by banks today includes fraud, system failures, terrorism and employee compensation claims. These types of risk are generally classified under the term 'operational risk'.

The identification and measurement of operational risk is a real and live issue for modern-day banks, particularly since the decision by the Basel Committee on Banking Supervision (BCBS) to introduce a capital charge for this risk as part of the new capital adequacy framework (Basel II).

This tutorial introduces Operational risk and overviews the risks and looks at some of the techniques uses to manage these.

Objectives
you should be able to:

• Define operational risk
• Describe the types of events that are generally classified as forms of operational risk
• Explain the different techniques that banks use in the assessment and management of operational risk