Basel Committee releases new op risk sound practices paper

The risk management group of the Basel Committee on Banking Supervision today released a final paper outlining a framework for the effective management and supervision of operational risk.

The paper, ‘Sound Practices for the Management and Supervision of Operational Risk’, follows a consultative paper released in July 2002. It was drafted for use by banks and supervisory authorities when evaluating operational risk management policies and practices at individual institutions.

The paper generally advocates strong oversight by the bank’s board of directors and senior management, a strong operational risk culture throughout the organisation, effective internal reporting and contingency planning. After the publication of the July 2002 paper, many national groups, including the UK Financial Services Authority’s operational risk implementation advisory group (ORIAG), provided input for the Basel Committee’s revisions.

The February paper seems to be a fine-tuning of the July 2002 draft, more than a radical overhaul. Changes, for the most part, come down to the addition of a word or the reorganising of a sentence. One member of the Basel Committee that redrafted the document described it as “a matter of refinement”.

“The real question is how will this paper fit in with this issue of international convergence of supervisory policing of the operational framework,” said Richard Metcalfe, a director at the International Swaps and Derivatives Association in London and a member of the ORIAG group. “Can we build on that to have some true international co-ordination? It is a vital point.”

The Committee member added: “The hope is that this is something that can be used and adopted by banking supervisors in all jurisdictions. Whether we will achieve this or not, one never knows. But we feel that we have a good document here.”