Operational Risk Management Practices

Abstract

In this chapter, we discuss the three pillars of operational risk management: capital allocation, transfer of operational risk through insurance, and proactive mitigation of operational risk through product inspection and quality control. Thorough operational risk management will generally involve all three pillars. While the first two pillars are fairly well understood and have been the subject of attention from the Basel Committee and other regulatory bodies, the third pillar is equally important though less familiar to those tasked with operational risk management. Regardless of which pillar an institution elects to rely on for operational risks in general or for a particular operational risk, the procedure to begin managing operational risk is the same.