The Specifics of Operational Risk Assessment Methodology Recommended by Basel II

Abstract

Operational risk management is a relatively new process in most of the banks. The need for managing this type of risk arose in the context of recommendations for bank supervision formed by the Basel Committee on Banking Supervision. The Basel Committee took into consideration the growing importance of operational risk in the field of finances and emphasized the risk management and management supervision. The Basel Committee connects the operational risk with the risk arising from unsuitable or unsuccessful internal processes, people, systems or external incidents. In the banking sector, this type of risk was compared to credit and market risks, which are treated as most important bank risk, generating the main part of risk events in banks sector. In the sector of finances, distinctive frameworks for supervision of operational risk management are beginning to form. The goal of these frameworks is to ensure an effective supervision of operational risk management in banks. In its recommendations on risk assessment methods, the Basel Committee pays a lot of attention to the measurement of the risk level and to the administration of the risk management. The position that the Basel Committee is taking reflects the importance of operational risk management supervision in the process of establishing a structural base for operational risk management. This enables the formation of close ties between operational risk management and management supervision frameworks. These ties have to be assessed correctly before any implementation of operational risk management methods in banks; therefore there is a need for the analysis of recommendations of the Basel Committee on the specifics of operational risk assessment methods within the context of operational risk management supervision. Depending on the character of bank activities, the focal attention in forming the system of bank supervision is normally paid to the management of the risk of bank credit as to the biggest focus of disorders of bank activities. However the modern conditions of the activity of financial sector members determine the growing attention of banks for the security of effectiveness of inner processes. The more complex procedures of bank activity and more intensive internal processes create preconditions to higher quantity of mistakes in internal bank systems. Therefore there is a threat of frustration of bank activity which can become the reason of crisis of bank activity. These reasons force bank managers to pay more attention to the management of operational risk, the efficiency of which has the big influence on bank competitiveness and its success in the market. In this context it is important to state that before the adaptation of approaches of an estimation of operational risk in bank activity, recommended by the Basel Committee, it is necessary to investigate the specificity and applicability of these approaches in the activity of a particular bank and to analyse the properties of the use of approaches of an estimation of operational risk in the context of supervision of management of operational risk.