The Near-miss Management of Operational Risk

This article discusses the management process of operational risk in financial institutions. The authors summarize the difficulties associated with the applicability of traditional risk management means to operational risk and introduce the Near-Miss management concept as a potential tool for the banking industry. INTRODUCTION Over the last decades, both the banking industry and regulatory bodies have devoted massive resources to the management of market and credit risk. Models have been developed to assess both risk types based on which regulators set out transparent rules on capital requirements, supervisory review process, and market discipline to prevent banking crises. Those principles form the three pillars of “The New Basel Capital Accord” which has been issued by the Basel Committee on Banking Supervision (BCBS) in January 2001. It is not surprising that the regulation of the banking sector initiated a still ongoing debate about whether it should exist and if so, which risks should be covered under which pillar(s). Particularly the first pillar “minimum capital requirement” evoked a lot of discussion about its appropriate definition. We refer to Danielsson [2000] for a critical review on the properties of different risk measures, primarily of Value-at-Risk (VaR). Irrespective of this debate, the increasing sophistication in quantitative methodologies for market and credit risk measurement allowed banks to reduce their required capital allocation.