Operational Risk Management in Financial Institutions

Abstract

Constant exposure of financial institutions to different sorts of risk, and the complexity of the methods for their identification, assessment, monitoring, control and measuring, i.e., the process of integrated risk management has reached the highest level of business-expert thinking and decision making. The financial industry has, above all, developed the standard methods for managing and measuring market and credit risks, but the operational risk as well. However, it turned out to be a very important cause of financial losses (Di Renzo et al, 2007). Since the majority of financial bankruptcies stem from joint effects of market, credit and operational risks, risk management should be an integral part of corporate decision making through business activities and types of risks. Financial institutions are being exposed to the intensified global sources of risk, due to the expansion of their own business activities, interaction between different risk factors and the connection between products and services with different types of market, financial and operational risks (Wu & Olson, 2010). Among other risk types that come with the activities of the financial sector, the economy and other types of organising business, operational risk holds a special position. Its very nature to be expressed in the fluid form and its presence in all segments of business activities tell enough of its importance and the need to manage it efficiently. Throughout the history, operational risks were managed by internal control mechanisms within business units, supported by audit. Nowadays, the financial industry has begun to use special structures and control processes specially designed for operational risk. Accordingly, Basel Committee on Bank Supervision established the obligation that the coefficient (quotient) of regulatory capital should keep the level of at least 8% of its risk-weighted assets, i.e., 12% of the total capital requirement (Basel, 2003). Management Journal for Theory and Practice Management 2013/66