Implementing the EU Capital Requirement Directive – key operational risk elements

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Basel II and the EU CRD introduce, for the first time, specific Operational Risk requirements for credit institutions and investment firms. With less than 2 years available to prepare for the introduction of the simpler Operational Risk approaches, some firms would find it useful for the FSA to prescribe specific detailed Operational Risk standards that could be taken into account whilst preparing for the implementation of the EU Directive. However a variety of considerations, including differences between firms in terms of size, scale of activity and complexity and uncertainties over the final version of the Directive, will prevent the FSA from prescribing a detailed range of qualitative Operational Risk standards. This paper seeks to identify the general Operational Risk standards currently embodied in the Basel and EU documents and to distil these standards into ten qualitative Operational Risk elements that are likely to be considered by the FSA as part of any assessment of a firm's Operational Risk framework. Given the variables and uncertainties that will impact on the FSA's expectations for specific firms this paper reflects the authors' views and not the corporate views of the FSA.

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... The remaining articles within Pillar II are categorised under the "Other" subgroup and address themes such as the key operational risk qualitative elements required for an appropriate risk management framework [66], or discuss weaknesses in the management of operational risks and inadequate practices in information systems outsourcing used in commercial banks in Nigeria [67]. ...
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Following the three-pillar structure of the Basel II/III framework, the article categorises and surveys 279 academic papers on operational risk in financial institutions, covering the period from 1998 to 2014. In doing so, different lines of both theoretical and empirical directions for research are identified. In addition, this study provides an overview of existing consortia databases and other publicly available sources on operational loss that may be incorporated into empirical research, as well as in risk measurement processes by financial institutions. Finally, this paper highlights the research gaps in operational risk and outlines recommendations for further research.
... However, meanwhile this independent review is key and, as Sheen (2005) states, it could provide a valuable challenge to the OR framework, there may be a need for greater focus on it. ...
Purpose – The objective of this paper is to provide a global perspective of the operational risk (OR) management framework from an internal audit viewpoint. Design/methodology/approach – This paper describes the new role of the internal audit function in reviewing the OR framework. Findings – An efficient OR management framework will improve and reinforce the internal controls of the organization. Internal audit should be alert to the whole process of implementation of the systems for managing OR in entities. Originality/value – This area has not been analyzed in depth to date. The paper provides a summary guide to audit of OR management frameworks in financial institutions.
Purpose The purpose of this paper is to examine the association among operational risk incidents, corporate governance, credit risk and firm performance. Design/methodology/approach First, the authors regress corporate credit risk on the incurrence of operating losses (driven by operational risk events) and corporate governance variables. The purpose is to test the correlation between operational risk, corporate governance and credit risk. Second, in the authors’ next regression, the authors’ dependent variable is firm performance, and the independent variable is operational risk and corporate governance to test the correlation between operational risk, corporate governance and firm performance. In this study, the authors measure corporate governance using four surrogates, focusing on CEO duality, extent of independent board members, extent of foreign ownership and board member presence ratio. Findings The authors’ findings indicate that the higher level of operational risk incidents is linked to higher likelihood of credit default and to poorer performance. More importantly, the authors find that higher-quality corporate governance is associated with lower levels of operational risk incidents, better performance and lower likelihood of credit fault. Originality/value The authors use a rigid theoretical and empirical framework to examine the association among the incidents of operational risk, credit risk, corporate governance and firm performance. The authors’ study is important because it first facilitates understanding of causes leading to operational risk, and second if and how greater financial effects of operational risk negatively influences operating performance and credit risk of nonfinancial institutions in emerging markets.
The purpose of this paper is to construct a risk quantification model to achieve the accurate operational risk management and gain the satisfying estimation and control of future possible extreme losses by using capital charges to assess operational risk. The paper takes a case bank as the research object and compares the differences under various circumstances engaging the Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach for the operational risk capital requirement of a bank. The results indicate that it is more appropriate to adopt the Advanced Measurement Approach to estimate the operational risk capital requirement; this way can help a bank enjoy a much lessened capital charge required and subsequently its available capital increases. Hence, it allows a bank to have sufficient funds in operations and reduce the burden of capital costs. Therefore, it will bring the positive benefits to the whole banking industry when enforcing the Advanced Measurement Approach.
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The objective of this paper is to provide a global perspective of the operational risk from a banking societies’ viewpoint. We describe the main regulations and settlements in the field and examine the various approaches of the operational banking risk. The paper presents the need of banks to managing operational risk. We study comparatively for a banking society the capital charge for covering the operational risk under the basic indicator approach and under the standardized approach. We present a case study of implementing current capital requirements at the level of a Romanian banking society. From the theoretical approach and from the description of quantifying of operational banking risk, the results of this study insist on the importance of measuring of operational banking risk and identifies major issues that need to be considered to improve the managing operational banking risk.
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