Critical evaluation of operational risk tools used in regulatory capital calculations

Abstract

Bank failures during recent years continue to cause stakeholders to question how board and senior management are overseeing and managing Operational Risk. This research evaluated the use of Operational Risk tools by South African banks who have adopted Advanced Measurement Approach (AMA) for management and calculation of Operational Risk capital, based on the Basel II requirements (Bank for International Settlements, 2006). The research was conducted under the assumption that when Operational Risk tools are adopted and used as prescribed by the Basel II Framework, it will lead to enhanced risk management practices and allow banks to identify emerging risks where controls can be designed to mitigate risks from materialising. This study was conducted using a quantitative method – the survey was sent to Operational Risk managers in the main segments of 3 South African AMA banks (ABSA, FIRSTRAND and NEDBANK), and senior managers in the group Operational Risk departments. The study found that Operational Risk tools are used and have been implemented as per Basel II requirements even though there are minor gaps. These tools have also been integrated in day-to-day processes; however there are some improvements required when it comes to a full integration and the use of the tools in the decision making processes.