Who 'Owns' Operational Risk?

Abstract

The increasing complexity of banking business has been responsible for the growing Operational risk events. Operational risk came to limelight during the Basel II negotiations on Capital charge. The nature of Operational risk is complex and dynamic. Unlike credit and market risk, operational risk is largely internal to banks, difficult to assess and has the potential to wipe out the very existence of the organization. It is proven without doubt that operational risk management improves the quality and stability of earnings, thereby enhancing the competitive position of the bank and facilitating its long term survival. For effective management of risk, an owner should be identified with each risk. For Operational risk the issue is more complex. One possible answer can be that the business lines own it, in which case ownership of Operational risk is aligned with the profit centre and the risk takers. In the standardised approach of Operational risk capital charge, Basel Committee on Banking Supervision used the mapping principle based on business line, which support the assumption that the business lines own operational risk and are responsible for day to day management. The present paper examines the efficacy of the proposed ownership of Operational risk.