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Article
Publication date: 1 December 2005

Stephen Manning and Andrew Gurney

Parts of this paper are based on a presentation on the same subject given by Stephen Manning to the Basel II & Banking Regulation conference organised by the Global…

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1815

Abstract

Parts of this paper are based on a presentation on the same subject given by Stephen Manning to the Basel II & Banking Regulation conference organised by the Global Association of Risk Professionals in April 2005. The paper reflects the experiences of the authors in developing and implementing risk management within the Lloyd's insurance market.

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Journal of Financial Regulation and Compliance, vol. 13 no. 4
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 20 June 2019

Christian Eckert and Nadine Gatzert

Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of…

Abstract

Purpose

Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the banking and insurance industry. The purpose of this paper is 1) to model such spillover effects in a network from a portfolio perspective and 2) to holistically assess operational risk, reputational risk and the risk of spillover effects, taking into account the dependencies between these risk types.

Design/methodology/approach

The authors propose different approaches to model spillover effects with different complexity, including stochasticity and influencing factors within the industry network. They then calibrate the model based on information from previous empirical literature.

Findings

The results emphasize that spillover effects can represent a considerable (non-diversifiable) risk, especially in portfolios, and that neglecting them may lead to a severe underestimation of the actual impact of single operational loss events.

Originality/value

This study is relevant not only for a firm’s risk management strategy but also for investors holding a portfolio of firms potentially subject to spillover effects.

Details

The Journal of Risk Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 April 2002

ANDREW KURITZKES

This article discusses the three approaches for setting capital charges for operational risk as proposed by the New Basel Accord. The article addresses a series of…

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1170

Abstract

This article discusses the three approaches for setting capital charges for operational risk as proposed by the New Basel Accord. The article addresses a series of questions raised by the Basel proposal related to defining, measuring, and reserving for operational risk. The author suggests that capital reserves may actually serve as a deterrent to reducing operational losses.

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The Journal of Risk Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 1 September 2002

Michael Mainelli

Banks are often smug about their management of risk. Smugness may well be justified for market and credit risks, but banks can learn much from industry about managing…

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5306

Abstract

Banks are often smug about their management of risk. Smugness may well be justified for market and credit risks, but banks can learn much from industry about managing operational risk. In order to manage operational risk, industry has evolved enterprise risk/reward management systems which coordinate an internal market for risk with variations to capital charges. Industry has at least three lessons to teach banks: use activity‐based costing variances to quantify operational risk; link operational risk to external prices via an enterprise risk/reward management system; and establish measures to govern an enterprise risk/reward unit.

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Balance Sheet, vol. 10 no. 3
Type: Research Article
ISSN: 0965-7967

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Article
Publication date: 1 February 2000

ROBERT CESKE, JOSÉ V. HERNÁNDEZ and LUIS M. SÁNCHEZ

Operational or event risk is not a new phenomenon for financial services companies. However, its measurement, as part of integrated risk management programs, has been the…

Abstract

Operational or event risk is not a new phenomenon for financial services companies. However, its measurement, as part of integrated risk management programs, has been the subject of recent focus. Property and casualty insurers have measured components of this risk class as part of the pricing and underwriting process. Although all financial services firms are exposed to direct and indirect (e.g., reputational) costs of operational risk events, few financial services firms actually measure “operational risk.” This article explores ways in which this may be done in practice.

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The Journal of Risk Finance, vol. 1 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 4 March 2019

Chiungfeng Ko, Picheng Lee and Asokan Anandarajan

The purpose of this paper is to examine the association among operational risk incidents, corporate governance, credit risk and firm performance.

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1476

Abstract

Purpose

The purpose of this paper is to examine the association among operational risk incidents, corporate governance, credit risk and firm performance.

Design/methodology/approach

First, the authors regress corporate credit risk on the incurrence of operating losses (driven by operational risk events) and corporate governance variables. The purpose is to test the correlation between operational risk, corporate governance and credit risk. Second, in the authors’ next regression, the authors’ dependent variable is firm performance, and the independent variable is operational risk and corporate governance to test the correlation between operational risk, corporate governance and firm performance. In this study, the authors measure corporate governance using four surrogates, focusing on CEO duality, extent of independent board members, extent of foreign ownership and board member presence ratio.

Findings

The authors’ findings indicate that the higher level of operational risk incidents is linked to higher likelihood of credit default and to poorer performance. More importantly, the authors find that higher-quality corporate governance is associated with lower levels of operational risk incidents, better performance and lower likelihood of credit fault.

Originality/value

The authors use a rigid theoretical and empirical framework to examine the association among the incidents of operational risk, credit risk, corporate governance and firm performance. The authors’ study is important because it first facilitates understanding of causes leading to operational risk, and second if and how greater financial effects of operational risk negatively influences operating performance and credit risk of nonfinancial institutions in emerging markets.

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International Journal of Accounting & Information Management, vol. 27 no. 1
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 1 April 2002

ALEXANDER MUERMANN and ULKU OKTEM

Over recent decades, banks and bank regulators have devoted substantial resources to managing market risk and credit risk. More recently industry and regulatory focus has…

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1201

Abstract

Over recent decades, banks and bank regulators have devoted substantial resources to managing market risk and credit risk. More recently industry and regulatory focus has shifted to the mitigation of operational risk. This article addresses the Advanced Measurement Approaches under which banks would be allowed to determine capital requirements, based on their own internal assessment of operational risk, according to standards set by the Basel Committee. The authors propose adopting the concept of “nearmiss” risk assessment employed in the chemical, health, and airline industries to internally evaluate operational risk.

Details

The Journal of Risk Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 7 June 2011

Marliana Abdullah, Shahida Shahimi and Abdul Ghafar Ismail

The purpose of this paper is to assess key issues in measurement and management of operational risk in Malaysian Islamic banks.

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6853

Abstract

Purpose

The purpose of this paper is to assess key issues in measurement and management of operational risk in Malaysian Islamic banks.

Design/methodology/approach

Descriptive, analytical, and comparative analyses are used to discuss the issues of operational risk in Islamic bank through the implications associated with the Islamic banks' operational risk as well as the implications on risk measurement, risk management, and capital adequacy.

Findings

Discussion on operational risk in Islamic banks is significant and becoming more complicated compared with conventional banking because of the unique contractual features and general legal environment. While basic Basel II core principles of effective banking supervision apply equally well and ideally suit the Islamic banking institutions, risk measurement, and risk management practices still need specific adaptations to Islamic banks' operational characteristics. These particularities highlight the unique characteristics of Islamic banks and raise serious concerns regarding the applicability of the Basel II methodology for Islamic banks.

Research limitations/implications

This study has important implications for the understanding of operational risk, particularly the specific issues of the Islamic banks' operational risk that arise from the different nature of the financing and investment activities of the banks. With regard to measuring operational risk capital charge, the banks have to choose the right and effective method to ensure the operational risk capital charge will be more in line with the banks' actual risk profile and thus will provide the adequate capital and an improved buffer once the losses are announced.

Originality/value

The paper will fill the gap to the existing literature of operational risk in banking institutions especially Islamic banks, by showing the needs of specific adaption of operational risk measurement and risk management practices due to the nature of Islamic banks.

Details

Qualitative Research in Financial Markets, vol. 3 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Content available
Article
Publication date: 27 July 2021

Komal Altaf, Huma Ayub, Malik Shahzad Shabbir and Muhammad Usman

Due to increase in operational risk, banks are facing huge losses. In order to avoid losses, banks need to manage operational risk. This study aims to analyze the impact…

Abstract

Purpose

Due to increase in operational risk, banks are facing huge losses. In order to avoid losses, banks need to manage operational risk. This study aims to analyze the impact of operational risk management (ORM) processes, which include identification, assessment, analysis, monitoring and control in the presence of corporate governance (CG) that can also contribute to effective ORM practices.

Design/methodology/approach

Operational risk management processes are used to manage operational risk along with CG. Primary data are collected through questionnaire from (167) operational risk managers of commercial banks. Multiple linear regressions has been run to analyze the data.

Findings

Results indicate significant impact of CG and operational risk identification (ORI), monitoring and control on ORM practices in commercial banks of Pakistan.

Originality/value

The study suggests policy makers to improve the ORM framework by CG. Beside this, in order to lessen operational risk, proper identification, monitoring and control of operational risk could also contribute.

Details

Review of Economics and Political Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2356-9980

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Book part
Publication date: 20 June 2003

Jeffry M. Netter and Annette B. Poulsen

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms…

Abstract

The 1988 Basel Accord and the proposed revisions to the Accord represent some of the most significant international regulations impacting the financial decisions of firms, in this case, financial services firms, in recent years. The revisions to the Accord incorporate operational risk into the capital, supervisory and market requirements. In our review of the issues in this area, we provide insight into the workings of an important international regulation. We also present suggestions for further research in this area that will become feasible when data on the impact of the new regulations become available after the proposed implementation in 2006.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-84950-214-6

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