Chapter 9 Learning Outcomes Flashcards
Understand the role of regulation in the development and management of operational risk
Regulation plays a crucial role in shaping the operational risk management landscape. It sets the framework within which firms identify, assess, manage, and report operational risks. Regulations, such as those developed by the Basel Committee on Banking Supervision and adopted in various jurisdictions, ensure that firms maintain adequate capital against operational risks and implement robust risk management practices. This regulatory oversight encourages firms to adopt best practices in operational risk management, contributing to the stability and integrity of the financial system
Define the key regulatory influences on operational risk.
Key regulatory influences on operational risk include international regulatory bodies like the Basel Committee on Banking Supervision, which sets global standards for risk management and capital adequacy in banking. National regulators also significantly influence operational risk through the implementation of these international standards within their jurisdictions. Additionally, specific regulations like Sarbanes-Oxley in the U.S. focus on corporate governance and financial reporting integrity, indirectly impacting operational risk management practices.
Describe evolving approaches to regulation and supervision.
Regulatory approaches to operational risk have evolved from focusing primarily on qualitative management practices to incorporating quantitative measures of risk and capital requirements. The introduction of Basel II marked a significant evolution by requiring banks to hold capital specifically for operational risk. This approach has continued to evolve with Basel III, which streamlined operational risk capital requirements and emphasized the importance of comprehensive risk management practices.
Describe regulatory interest in specific operational risk categories.
Regulators have shown particular interest in specific operational risk categories such as IT and cyber risk, outsourcing risk, and business continuity planning. This interest is driven by the potential for these risks to impact not only individual firms but also the financial system as a whole. Regulatory guidance and standards focus on ensuring that firms have effective controls and management practices in place to mitigate these risks.
Explain the capital adequacy implications of operational risk management.
The capital adequacy implications of operational risk management involve the requirement for firms to hold sufficient capital to cover potential losses from operational risk events. This is achieved through regulatory capital requirements specified in Basel II and III, which introduced various approaches for calculating operational risk capital, such as the Basic Indicator Approach, Standardised Approach, and Advanced Measurement Approach. These requirements ensure that firms are resilient to operational losses, thus protecting the financial system and promoting stability.
