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There are many definitions of 'operational risk', often dependent on the context of the organisation or individual defining it. Some are broad in scope attempting to cover all the bases, others seem limited to the downside of risk (i.e. threats). Which definition do you think is most relevant to today's op risk environment?

Please quote the source where available.

edited Feb 19 at 12:08

Zoe Z♦♦
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asked Jan 13 at 13:03

John♦♦
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Stephen J · Accepted Answer · 2010-01-18 20:52:00Z UTC

Basel II defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Personally I dislike this definition as it focuses only on the negative aspects of risk.

Furthermore a serious flaw of the Basel II definition of operational risk is that it specifically excludes strategic risk - the risk of a loss arising from a poor strategic business decision. I'd suggest this flaw has been fatally exposed by the credit crunch and subsequent failure of major banks. In particular the failure of RBS who were specifically warned by their Risk Officer about the risks in the business model and the risk of acquiring ABN Ambro at the height of the stockmarket,.

Zoe Z · Answer 2 · 2010-02-23 12:14:48Z UTC

Like Basel II, Solvency II directive defines operational risk as:

the risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events;

Source: Solvency II Directive (2009)

Interestingly, Solvency II differs in its use of 'personnel' rather than 'people' which is potentially important since - to me at least - personnel refers to employees whereas people is a broader term.

It's also noteworthy this definition does not include systemic risk which some might find relevant considering the recent financial turmoil.

Definition of Operational Risk?

2 Answers