The major sources of operational risk and the potential benefits of its management

Wael Hemrit and Mounira Ben Arab

Abstract

ABSTRACT

The definition of operational risk given by Basel II is problematic when applied to institutions, since the risk only represents a potential loss. Staff and systems are considered to be the causes of losses, but this definition of risk does not take into account the fact that these entities are best placed to identify the sources of potential losses and to issue warnings in order to measure and manage this risk. This observation proves that there is no universal methodology for managing this risk. Furthermore, it is in a company's interest to manage and control risk, but the benefits of this management have not yet been fully understood. This paper aims to identify the main sources of operational risk and to explain the potential benefits of managing such risk.