Scenario 3

Operational risk is the risk of some adverse outcome resulting from acts undertaken (or neglected) in carrying out business activities, inadequate or failed internal processes and information systems, misconduct by people or from external events and shocks. Operational risk is a generic risk present in operations which exists even before any deposit is accepted or a credit is granted by a bank. Operational risk is considered as a risk characterised by idiosyncrasy. Financial institutions, especially the banks worldwide have been seen placing increased emphasis on the management and measurement of operational risk. Modern approach of Operational Risk management which particularly stresses its measurement and linkage with the bank capital adequacy is considered as a new frontier of value creation and efficiency in banks. The need of an explicit capital charge to address a banks operational risk exposure has been felt by the Basel Committee of Banking Supervision (BCBS), as many banking institutions in the developed countries were shaken by mega operational failures emanating from events of fraud, technological failure or due to control breakdowns resulting in collapse of age old financial institutions like, Barings Bank of UK, Daiwa of Japan etc.

Task 1

Explain briefly what are the different types of operational risks affecting the banking institutions?

(4 marks)

please attache the references