| Abstract
Basel II has been among the top priorities for banks
since past couple of years and will continue to be so,
as they chase the timelines till 2007. Banks have been
busy understanding, deciphering and implementing as
per the guidelines laid down by Basel II. Though, debate
continues on issues such as ‘Homehost’,
banks are making significant progress in areas where
there is clarity, consensus and a sense of direction.
This is the first time banks are facing
Operational risk as a capital charge, even though this
facet of risk has always been around since banks started
functioning. Operational risk is the risk which banks
face on account of loss resulting from inadequate or
failed internal processes, people or systems or from
external events. Besides the regulatory push, a need
for operational efficiency, improved processes in an
increasingly complex, technology oriented environment,
coupled with stakeholder pressure have driven firms
to adopt an active operational risk program.
This paper analyzes the Basel accord,
its three pillars, risk capital calculation approaches
defined under Pillar 1 covering values which banks can
derive from the program. Designing an operational risk
solution is a challenge as unlike credit and market
risk, it does not easily lend itself to quantitative
measurement and analysis. The paper further discusses
in detail approach to designing and implementing a Basel
compliant Enterprise wide Operational risk application.
Author
Sandeep Chandane
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