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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.

This study aims to empirically investigate the impact of operational risk (i.e. supply, manufacturing and demand risks) on supply chain performance and the moderating role of integration (i.e. supplier, internal and customer integrations) in mitigating the impact of these risks, respectively.

A research framework of hypotheses is tested by structural equation modeling with data collected from the fourth round of the high-performance manufacturing project.

It is revealed that manufacturing and demand risks negatively impact operational performance, and more importantly, internal and customer integrations help to reduce the impact of these two risks. Additionally, the effects of both supply risk and supplier integration are only significant for large firms.

Supply chain managers need to appropriately develop the levels of integration to mitigate the adverse impact of operational risk.

Operational performance is always threatened by different types of risk that adversely affect the supply, production and demand sides of manufacturing firms. Despite this fact, large-scale data-based empirical research on the impact of operational risk on the performance of supply chains has been scarce. This study aims to fill this literature gap.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

Amid increased size and complexity of the banking industry, operational risk has a greater potential to occur in more harmful ways than many other sources of risk. This paper seeks to provide a succinct overview of the current regulatory framework of operational risk under the New Basel Accord with a view to inform a critical debate about the influence of data collection, loss reporting, and model specification on the consistency of risk‐sensitive capital rules.

The paper's approach is to investigate the regulatory implications of varying characteristics of operational risk and different methods to identify operational risk exposure.

The findings reveal that effective operational risk measurement hinges on how the reporting of operational risk losses and the model sensitivity of quantitative methods affect the generation of consistent risk estimates.

The presented findings offer tractable recommendations for a more coherent and consistent regulation of operational risk.