Good Practices to Manage Operational Risk in Financial Institutions

The Basel Committee on Banking Supervision (BCBS) defined operational risk (OR) as the risk of losses resulting from the inadequacy or failures in the internal processes, people and systems, or from external events. This definition includes the legal risk but excludes strategic and reputational risk. Traditionally, individual ORs management has been an important part of banks’ efforts to prevent fraud and keep the integrity of internal controls, among other aspects. However, a relatively new approach considers operational risk management as a comprehensive practice comparable to the management of other risks (such as credit or market risk). At the same time, it measures the losses deriving from OR events and requires regulatory capital to face such events. Since operational risk has consolidated as a comprehensive risk category, the BCBS has issued a series of internationally-accepted principles or good practices for OR management and supervision in financial entities. This document analyzes these best practices and their application to international banks’ structures. Likewise, the paper analyzes the regulations of a sample of Latin American countries that have issued standards on good practices related to this topic. It is worth mentioning that the main countries of the region have created a regulatory framework tending to implement OR management structures in financial institutions based on the recommendations and principles of the BCBS.