RISK MANAGEMENT

Risk Management

Risk Management

Basel Committee

In the 1990s, a number of infamous financial disasters were tied to the use and disclosure of derivatives (e.g., Daiwa, Barings, Procter & Gamble, Orange County and Long-Term Capital Management). As Jorion (1997) claimed, such embarrassing debacles could possibly have been avoided if derivative disclosure had been done properly and promptly. The current global financial crisis is also linked to a large amount of investments in derivatives related to subprime mortgage. In Nov 2008, the Group-20 (G20) Summit highlighted the necessity of enhancing risk disclosure of complex financial instruments by financial institutions to capital markets (Nachane, Ghosh and Ray 2006).

Basel I

The original Basel Accord was agreed in 1988 by the Basel Committee on Banking Supervision. The 1988 Accord, now referred to as Basel I, helped to strengthen the soundness and stability of the international banking system as a result of the higher capital ratios that it required (Nachane, Ghosh and Ray 2006). The Basel Accord was implemented in the European Union via the Capital Requirements Directive (CRD), which was designed to ensure the financial soundness of credit institutions (banks and building societies) and certain investment firms. The CRD came into force on 1 January 2007, with firms applying the advanced approaches from 1 January 2008 .

Basel II

The 2004 Basel committee presents the definition of operational risk. It is the loss which results from the insufficient or unsuccessful internal functions, people and structures or external cases (Nachane, Ghosh and Ray 2006).

Comprehensive management of operational risk has become a major issue for banks. Long ignored, operational risk, however, differs in its complexity and diversity. To classify the differing types of operational risk, Basel II defines seven main categories of events of fraud dysfunctional systems, through the procedures. An error in the processing of financial transactions is recorded in the processing of financial transactions as operational risk procedures (Nachane, Ghosh and Ray 2006).

Basel II has introduced the concept of operational risk and more particularly human risk. The news has shown the two faces of human risk: the failure and fraud. Two aspects of human risk that makes all the more difficult to quantify the coverage of capital required. There are many reasons for this, which leaves strengthening prudential supervision of banks, and implementation of Basel III, prior to 2012. This puts the management of operational risks in the heart of the concerns for financial institutions. The process management provides banks the methodology and organization tools for operational risk management (Nachane, Ghosh and Ray 2006).

Operational risk is not a completely new venture for banks as evidenced by the efforts made in recent years by the last in the mapping of risk management of securities (trading mediation, settlement and organizational management). It is not over an unknown risk of banking supervisory authorities which, together, have built a long time in their analysis of the risk profile of institutions credit (Nachane, Ghosh and Ray 2006). Operational risk has been the subject of attention particular both through white papers published by the Banking ...