Capital for Operational Risk: Some Fundamental Flaws

René Doff

In around 1999, the financial industry got acquainted with a new participant in the risk spectrum: the concept of operational risk. In 1999, the Basel Committee on Banking Supervision launched its first consultation paper to explore the possibility of setting capital charges for operational risk in the context of the then-foreseen Basel II Accord. This followed logically the occurrence of various losses in the financial industry that were not fully attributed to market or credit risks. While the discussions focused first on getting the definition right, the concept of operational risk in its new definition was soon incorporated into the total framework of risk management, along with mitigation instruments and measurement methodologies. It is this latter aspect that is the topic of this chapter.

Measurement methods for operational risk developed rapidly within the banking industry after the first Basel II consultation papers. In addition to loss data modelling, qualitative methodologies were also proposed for banks. Ultimately, Basel II11This chapter refers to Basel II rather than Basel III since the main structure of the regulation did not change from Basel II to Basel III. In

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