Operational Risk: Where Do we Stand?

Abstract

In the previous six chapters of this book we dealt with issues of controversial nature using both expository (positive) and critical (normative) approaches. The discussion has led to the emergence of highly plausible propositions, at least as far as the present author is concerned. To start with, it seems that there is no universal agreement on how to measure risk in general: some risks are either unquantifiable or difficult to quantify, particularly some types of operational risk. Furthermore, many propositions have been put forward implying the near-impossibility of measuring the risks arising from infrequent events. This is the basis of distinguishing between financial and non-financial risk. Of particular importance to the measurement of operational risk is that measurement in terms of frequency and severity is inadequate for the purpose of assessing the continuity of business operations. While capital may protect a firm from insolvency, it is no guarantee that the firm will recover and resume normal operations following the onslaught of a major loss event.