Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Operational risk

Besides a better measure of credit risk, a second major innovation in the Basel II framework is to include a capital charge for operational risk. This refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk; that is, potential losses resulting from lawsuits. Here is an example. On 14 May 2001, a trader of an investment bank in London keyed in the wrong number of shares on her trading screen. The mistake meant that a sell order on a basket of shares worth a reported $30m turned into one valued ten times that. The London stock market index, the FTSE 100, fell by 2.2% when the trade was made. To preserve its reputation, the investment ...