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By Carol Alexander

Advancements in IT and e-commerce, large-scale mergers and acquisitions, andincreased outsourcing all recommend that operational hazard exposures are substantialand becoming. lately, bankers and monetary professions have recognizedthe the most important and turning out to be significance of operational probability administration, and thefield is at the moment present process a surge of innovation and improvement. In thisauthoritative, updated publication, Operational hazard, best operational riskmanagement professional Carol Alexander brings jointly contributions from theworld's top specialists to spot latest most sensible practices for measuring andmanaging operational hazards, and assessing them within the broader context of allrisk.

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Example text

The Risk-Focused Manual guidance on risk classes makes clear distinctions between market, credit and operational risk. Basel’s operational risk definition, however, suggests that a breakdown or inadequacy in, for example, credit risk reporting may be operational risk. The distinction is cause and effect. 8 To truly identify the root cause of a problem, the 8 For example, failure to perfect a lien on property that secures a loan is an operational failure. However, this failure is, typically, counted as a credit loss if the debt is not repaid in full.

Moreover, some institutions assert that audit is the operational risk management department. However, the Basel II rollout scheduled for the end of 2006 suggests that, for institutions expecting (and maybe required) to use the higher approaches (Standardized and AMA), traditional decentralized business line management should be complemented by both independent internal audit and corporate risk management. In this way, business unit management will be reinforced by firm-wide controls that are subject to periodic validation by internal audit.

Some banks may choose to remain on the simpler approaches, disclose the fact and add qualifying discussion on why they have not moved to an advanced approach – perhaps on the basis of costs and benefits, or perhaps because their internal approach has not achieved supervisory acceptance. Perhaps rating agencies and counterparties will be content with this, but it seems likely that once a critical mass of significant banks have achieved acceptance of their Advanced Measurement Approach, their peers will soon wish to follow suit and a momentum towards the enhanced risk management inherent in AMA will be achieved.

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