Operational Risk Management: Basel II Compliance

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Basel II is a framework which has been introduced as a major requirement for best practices in all business and financial institutions. This is because it governs some important aspects of corporate environments for better performance.

Operational Risk Management (ORM) means the process involving risk assessment, risk decision making and implementation of risk controls. These are implemented as best practices to ensure acceptance and mitigation (if not elimination) of the risk factors, which could be internal, external or human. Basel II requires standards in the various processes involved in banking institutions to ensure best practices. Therefore a combination of Basel II compliance and Operational Risk management has numerous benefits.

An important benefit of combining ORM and Basel II compliance as a best practice is that there will be improvement in performance because banks will be able to meet expectations of the Basel Accord. Additionally there will be options for handling internal loss of database effectively. CEOs, risk managers, audit managers, project managers, business heads and directors will be able to implement risk self assessment protocols as best practice. Additionally they will be able to assess the markets and make necessary decisions adequately to control risk factors and managing internal loss data.

Internal loss data includes the Basel rules and requirements which have key objectives. Therefore, Basel II compliance facilitates accuracy and methods of obtaining internal loss data for the purpose of implementing best practices in banking. There must a standard structure for internal loss data presentation for adequate analysis. Basel II compliance and ORM will ensure proper analysis and consideration for expected and unexpected losses.

Furthermore, there must also be a risk register which will be effective in keeping records of risks anticipated and validated for future references. Additionally, a risk register can serve as a manual for guidance for best practices. This is important for business continuity and risk management at various levels and departments.

When it comes to external loss data and scenario assessment Basel II compliance and ORM will have two approaches: shared and public approach. There will be need for practical case study in order to identify and study the different scenarios as they unfold. This will guide high ranking officers in business process modeling. It involves identifying the key controls, types of approaches for best practices and methods for controls and risk self assessments in compliance with Basel II.

There will be need for knowledge on the Basel rules, their objectives, techniques involved to ensure accuracy. Moreover, there will be need to consider the problems associated with control and risk self assessments in practice. There are key risk indicators which must be identified as best practice to ensure damage control.

Managers must know how to develop and design the risk indicators and how to know whether these indicators were working or not. Additionally, there will be need to ensure there is no stress along the process of ORM and Basel II compliance. Therefore, sensitivity analysis will be necessary as well as a suitable stress test. This includes ensuring that there is proper IT and uninterrupted protocols to minimize stress on people involved.

Conclusively, Operational Risk Management and Basel II work hand in hand to improve best practices in order to mitigate risks.

Further reading: Corporate Governance | Audit | Performance Improvement

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