A discussion of Basel II and operational risk in the context of risk perspectives

The Basel II Capital Accord, established in 2007, provides guidelines for operational risk management, including requirements for a capital charge. The quantitative analysis for the capital charge requires inclusion of both quantitative and qualitative information, an implementation that has proven challenging for the banking industry. A contributing factor may be the interpretation and communication of risk and uncertainty, which are affected by the underlying risk perspective. Identified ambiguities in the Basel II Capital Accord indicate confusion regarding the underlying risk perspective, including uncertainty. Hence, raising the question of the underlying risk perspective and whether the Basel committee has consciously chosen this risk perspective. Answers are found by analysing the required quantitative and qualitative input as well as method, in the context of risk perspectives and key elements; such as uncertainty, accuracy and validity. Establishing awareness and a fundamental understanding of risk perspectives may reduce ambiguities in the Basel II Capital Accord, thus increasing the potential for establishing sound operational risk management.