The Concept of Operational Risk

Abstract

What is common between Nick Leeson and John Rusnak? Do they in any way have anything in common with Saddam Hussein? What is common among rogue trading, fraud, theft, computer hacking, industrial espionage, the onslaught of computer viruses, threats to personal privacy, loss of reputation, loss of key staff members, and the loss of information technology infrastructure? What is common among what happened to the Bank for Credit and Commerce International (BCCI) in 1993, Barings Bank in 1995, Diawa Securities in 1995, Bank of America in 2001, the Allied Irish Bank in 2002, the Central Bank of Iraq in 2003, and the Central Bank of Brazil in 2005? And what is common among Enron, Arthur Andersen, WorldCom, and HealthSouth? The general answer is simple: the names, (mal)practices, and events pertain to operational losses resulting from exposure to operational risk. To see the connections, let us examine these questions in turn.