The BIS operational risk reviews: Let us not miss the chance of necessary change

Abstract

The Basel Committee is reviewing all three of the operational risk-derived regulatory capital approaches. Although the scope of the review has not been revealed, it is laudable to have one, as it will have an impact on an area that has not changed much since the crisis began. It is hoped, however, that the reviews are not limited to tuning weightings and improving transparency. The main area that the author would like to see reviewed is operational risk, as, arguably, the three causes of the 2007 credit crisis were poor liquidity exacerbated by reputational risk considerations, poor governance and risk management, and a culture where unwise remuneration practices drove excessive risk taking. The review could go further as major and significant new risks need to be considered, such as regulatory risk, which could mean that the risk of compliance failures and infringements affects ability to carry out the business. It is to be hoped that the BIS review does not simply apply a coat of paint to a crumbling building.