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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