Overview

While market and credit risks are clearly at the heart of bank activity, operational risk and business risk play an important role as well. Operational risk has gained increasing attention since the mid-1990s not only because of banking crises (e.g., Barings), which were driven mostly by fraud, human error, and missing controls, but also because the Basel Committee made clear since 1999 the intention to introduce a new regulatory capital requirement for operational risk in addition to market and credit risk. The Basel Committee also proposed a regulatory definition of operational risk, whose boundaries often used to vary significantly from bank to bank. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk (Basel Committee 2006a, 644).

Business risk, on the other hand, has not been assigned an MRCR by supervisors, but it is still very important for a bank. Business risk is defined here as the risk of losses deriving from profit volatility for fee-based businesses (such as advisory services in either corporate finance or private banking businesses, asset management, and payment services, among many others). While its impact on book capital may often be limited, its impact on the bank s market capitalization may be much larger. Hence, for business risk the concept of capital that is considered (according to the distinctions set out in Chapter 2) is particularly relevant.

This chapter is structured...