Fundamentals of Risk Management

operational risk management
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Basel II and Basel III
Basel II has been in existence for some time and, at the time of writing this book 
(2016), Basel III requirements have been developed, but may not be introduced until 
2019. The revised requirements contained in Basel III are likely to be consistent with 
what has gone before. Likewise, the development of Solvency II that will define 
capital requirements for insurance companies has been completed and the date for 
full implementation is currently anticipated to be as late as 2019. The approach 
taken in Solvency II is consistent with the approach in Basel II and Basel III.
The 10 principles of ‘Sound Practices’ on operational risk put forward by the 
Basel II committee are set out in Table 30.1. One of the key requirements, as set out 
in Principle 5, is that processes necessary for assessing operational risk should be 
established. The intention of Basel II is to help protect the international financial 
system from the types of problems that might arise should a major bank or a series 
of banks collapse.
TAbLE 
30.1
ORM principles (Basel II)
The 10 principles on ‘Sound Practices’ of the Basel II committee are as follows:
1 The board is responsible for establishing the operational risk strategy.
2 Senior management is responsible for implementing the operational risk 
strategy.
3 Information, communication and escalation flows must be established.
4 Operational risks inherent in activities, processes, systems and products
should be identified.
5 Processes necessary for assessing operational risk should be established.
6 Systems should be implemented to monitor operational risk exposures and
loss events.
7 Policies, processes and procedures to control or mitigate operational risks 
should be in place.