Operational Risk Management: An Evolving Discipline

Operational Risk Management: An Evolving Discipline 4 Supervisory InsightsSummer 2006 Operational risk is not a new concept inthe banking industry. risks associatedwith Operational failures stemming fromevents such as processing errors, internaland external fraud, legal claims, andbusiness disruptions have existed atfinancial institutions since the inceptionof banking. As this article will discuss,one of the great challenges in systemati-cally managing these types of risks isthat Operational losses can be quitediverse in their nature and highly unpre-dictable in their overall financial impact. Banks have traditionally relied onappropriate internal processes, auditprograms, insurance protection, andother risk management tools to counter-act various aspects of Operational tools remain of paramount impor-tance; however, growing complexity inthe banking industry, several large andwidely publicized Operational losses inrecent years, and a changing regulatorycapital regime have prompted bothbanks and banking supervisors toincreasingly view Operational riskmanagement (ORM) as an Evolving disci-pline.

• Enhance risk management efforts by providing a common framework for managing the risk Quantifying Operational Risk: Roots in Economic Capital As ORM continues to evolve into a distinct discipline, efforts to quantify operational risk have gained momentum. A number of large financial institutions have been working to quantify opera-

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  Management, Operational, Capital, Risks, Working, Disciplines, Evolving, Operational risk management, An evolving discipline

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