The Basel II framework is a regulatory risk management standard for the banking sector. It establishes good practices and a framework for the definition, measurement, management, oversight and dissemination of the risks to which a financial entity is exposed. Operational risk has been added to the risks covered by this framework, which defines operational risk as the one related to losses resulting from inadequacy or failures in internal processes, the poor performance of staff or systems or those attributable to external events.
The Basel Convention proposes:
- A definition for operational risk, based on which a classification and assessment of the factors and events of loss could be established.
- A segmentation for relevant lines of business in terms of operational risk management.
- Capital requirements for banking entities by applying three measurement approaches: basic, standard and advanced.
Beyond the specific definition of operational risk, the top priority for banks is to implement a risk management process. This risk analysis process will provide the bank with proper risk management within the framework of international standards. An adequate process of operational risk management is understood as "management" of the process of "identifying, assessing, monitoring and control or hedging" of the operational risk.
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