Chapter 27 - Bank Operational Risk Dynamics and Management in Developing Economies

Abstract

Interaction between operational risk and other risks permeates the whole gamut of adverse events that affect banking outcomes in developing economies. The interaction sums up the real dynamics of operational risk in banking. Every threat that a bank faces crystallizes some operational risk somehow. That is the reality in most internal and external threats that constrain effective banking operations. Mostly, fraud is a typical internal threat. Fraudulent lending—an operational risk—is encapsulated in credit risk, the probability that counterparties may default on their bank loans. Frauds that money market dealers cause are yet another operational risk rooted in a critical banking risk—in this case, market risk. A similar interaction exists between operational and liquidity risk. Force majeure typifies external threats that profoundly skew banking outcomes. I analyze these interactions—highlighting implications for controls in banking—in the context of bank operational risk dynamics and nuances in developing economies.