Op risk is much more than a capital allocation exercise, says Moody's

While banks are focusing on the capital allocation guidelines of Basel II – banking regulators' planned new guidelines for the allocation of bank capital against market, credit and operational risks, which is due in 2006 – Moody's said it is encouraged that some banks are nevertheless broadening their approach to address the true challenges of operational risk.

Sam Theodore, Moody's managing director for European bank ratings and author of the new report, said: "We also believe that the use of quantitative criteria for operational risk management - building a loss database for the bank, benchmarking it against external industry data or trying to predict expected operational losses through statistical models - certainly has its place, but only as first step."

What remains critically important is the implementation of an effective qualitative process of identifying, measuring, managing and controlling operational risk throughout the organisation, said Moody's in its report.

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