Slide MGT305 Slide12

Operational Risk

Operational Risk

What Is Operational Risk?

•

Operational risk is the risk of loss resulting

from inadequate or failed internal

processes, people, and systems or from

external events.

•

This definition includes legal risk but does

not include business risk such as

Determination of Regulatory

Capital

• Banks have three approaches in determining operational risk regulatory capital.

Determination of Regulatory

Capital

•_{Another approach is the standardized}

approach that divides bank’s activities into eight business lines.

•The average gross income over the last three years for each business line is multiplied by a “beta factor” for that business line and the

Determination of Regulatory

Capital

Business line Beta factor

Corporate finance 18% Trading and sales 18%

Retail banking 12%

Determination of Regulatory

Capital

•

The last approach is the advanced

measurement approach (AMA) in which

operational risk regulatory capital

requirement is calculated by the bank

internally using qualitative and