Good practices for operational risk management in financial entities

Abstract

The Basel Committee on Banking Supervision (BCBS) defined operational risk (OR) as the risk of losses resulting from inadequacy or failures in internal processes, people, systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Traditionally, the management of individual ROs has been an important part of banks' efforts to prevent fraud and maintain the integrity of internal controls, among other aspects. However, what is relatively new is considering OR management as a comprehensive practice comparable to the management of other risks (such as credit or market risk), measuring losses from RO events and requiring regulatory capital to face them. Having consolidated OR as a comprehensive risk category, the BCBS has dictated a series of internationally accepted principles or good practices for its management and supervision in financial entities. This document analyzes these best practices and their application in the structures of international banks. Likewise, the regulations of a sample of Latin American countries that have issued standards on good practices in the matter are analyzed. It should be noted that the main countries in the region have developed regulations aimed at implementing OR management structures in financial entities, based on the recommendations and principles of the BCBS.

JEL classification: G21 ; G28