Employee errors, criminal activity such as fraud, and physical events are among the factors that can trigger operational risk.
Operational risks similarly may impact broadly, in that they can affect client satisfaction, reputation and shareholder value, all while increasing business volatility.
This means that as long as people, systems, and processes remain imperfect, operational risk cannot be fully eliminated.
Wider trends such as globalization, the expansion of the internet and the rise of social media, as well as the increasing demands for greater corporate accountability worldwide, reinforce the need for proper risk management.
Businesses in general, and other institutions such as the military, have been aware, for many years, of hazards arising from operational factors, internal or external.
The primary goal of the military is to fight and win wars in quick and decisive fashion, and with minimal losses.
For the military and the businesses of the world alike, operational risk management is an effective process for preserving resources by anticipation.
However, the near collapse of the U.S. financial system in September 2008[7][8] is an indication that our ability to measure market and credit risk is far from perfect and eventually led to the introduction of new regulatory requirements worldwide, including Basel III regulations for banks and Solvency II regulations for insurers.
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).
[12] Basel II and various supervisory bodies of the countries have prescribed various soundness standards for operational risk management for banks and similar financial institutions.
The ultimate choice of the methodology/methodologies to use in your institution depends on a number of factors, including: The Basel Committee on Banking Supervision (BCBS) has proposed the "Standardised Measurement Approach" (SMA) as a method of assessing operational risk as a replacement for all existing approaches, including AMA.
The objective is to provide stable, comparable and risk-sensitive estimates for the operational risk exposure and is effective January 1, 2022.