The rise and rise of operational risk

Operational risk arises from the possibility of losses resulting from the failure of people, processes, and systems and from external factors. Although it has been around since the creation of the Planet, operational risk has recently attracted the attention of regulators as well as the financial institutions exposed to it. The changing nature of banking and the introduction of automation on a wide scale has led to a rise in the significance of operational risk. This is why the Basel II Accord, unlike Basel I, has a lot of provisions for operational risk, which is treated separately from credit risk and market risk. The conclusion is that operational risk is here to stay and that the sophistication of the advanced measurement approach of Basel II is rather inconsequential as far as operational risk management is concerned.