Operational Risk Management Framework

Costs of Operational Risk

Various studies and the Consultation leading to Basel II suggested that on average Banks experienced in the eighties and Nineties at least 10% of net operating profit was lost due to operational risks and that this 10% was fluctuating substantially from year to year. Therefore operational risk became a key risk category. The reporting process around operational risk losses has developed but still unplanned events and significant accompanying losses have prevailed prior to and beyond the Credit Crisis where operational risk costs are sizeable as well as higher than expected. 

Besides the measurement of actual or expected operational risk losses, Banks measure the unexpected costs which operational risk will incur, both from a regulatory and economic perspective.