WASHINGTON A survey conducted by international regulators has found that retail and commercial banking operations are the source of more than 60% of operational risk-related losses suffered by large institutions.
The Basel Committee on Banking Supervision on Monday released the results of the survey, which was meant to measure the frequency and cost of operational risk-related losses at internationally active banks.
The committee, which is in the process of rewriting international bank capital rules, has decided that banks should hold capital to protect themselves from operational risk, which it defines as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events.
Industry officials have loudly opposed the idea of including an operational risk element in banks overall regulatory capital charge. Many critics say there is no way to accurately measure operational risk exposures, and therefore no accurate way to set capital requirements.
For their part, regulators have been adamant about retaining the operational risk component, and the survey appears to be the beginning of an effort to answer the critics with quantitative data.
The survey asked 30 banks in 11 countries to identify their operational risk-related losses from 1998 through 2000, and to classify them by cost, event type, and business line in which they occurred.
The number of loss events reported suggests that retail banking is far and away the most susceptible business line it accounted for 67.4% of all recorded operational risk losses. Within the retail banking business line, external fraud accounted for 28.5% of loss events, and failures in execution, delivery, and process management accounted for 24.9%.
The second-most susceptible line of business, according to the survey, was commercial banking, which accounted for 13.2% of the reported loss events. Payment and settlement was third, with 7% of the loss events.
The other sectors identified in the survey corporate finance, trading and sales, agency and custody services, asset management, and retail brokerage were each responsible for less than 5% of the loss events.
The cost of operational risk losses was more evenly spread across business lines, the survey found. The 30 institutions responding reported 2.6 billion euros of losses over the three-year period. Of that amount, 39.4% occurred in retail banking, 22.9% in commercial banking, and 19.1% in trading and sales.
In its discussion of the survey, the Basel Committees Risk Management Group noted that the limited scope of the study made it impossible to draw broad conclusions from the data, but the group said that it hoped to use the results to improve the construction of more detailed future surveys.
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