Risk Management and Financial Institutions, 4th Edition

CHAPTER 23 Operational Risk

In 1999, bank supervisors announced plans to assign capital for operational risk in the new Basel II regulations. This met with some opposition from banks. The chairman and CEO of one major international bank described it as “the dopiest thing I have ever seen.” However, as the implementation date for Basel II was approached, bank supervisors did not back down. They listed more than 100 operational risk losses by banks, each exceeding $100 million. Here are some of those losses:

• Internal fraud: Allied Irish Bank, Barings, and Daiwa lost $700 million, $1 billion, and $1.4 billion, respectively, from fraudulent trading.
• External fraud: Republic New York Corp. lost $611 million because of fraud committed by a custodial client.
• Employment practices and workplace safety: Merrill Lynch lost $250 million in a legal settlement regarding gender discrimination.
• Clients, products, and business practices: Household International lost $484 million from improper lending practices; Providian Financial Corporation lost $405 million from improper sales and billing practices.
• Damage to physical assets: Bank of New York lost $140 million because of damage to its facilities related to the September 11, 2001, terrorist attack.
• Business disruption and system failures: Salomon Brothers lost $303 million from a change in computing technology.
• Execution, delivery, and process management: Bank of America and Wells Fargo Bank lost $225 million and $150 million, respectively, ...