Operational risk: measurement issues, Basel II and UAE banks

Abstract

Operational risk is as old as the banking industry itself and yet the industry has only recently arrived at a definition of what it is. Still the controversy about the definition is not over. Ever since the Bank of International Settlements (BIS) adopted a new set of regulatory capital standards, organizations have begun identifying and evaluating methodologies to measure operational risk. The guidelines of the BIS are quite lucid about what constitutes operational risk. It is proved without doubt that the operational risk management improves the quality and stability of earnings, thereby enhancing the competitive position of the bank and facilitating its long term survival. The collapse of Bearings and the derivatives disasters were one among several factors that led to the revision of Basel-I and giving the due importance to operational risk measurement and management. But the problem lies in the standard measure of operational risk.