Difficulties
It is relatively straightforward for an organization to set and observe specific, measurable levels of market risk and credit risk because models exist which attempt to predict the potential impact of market movements, or changes in the cost of credit. It should be noted however that these models are only as good as the underlying assumptions, and a large part of the recent financial crisis arose because the valuations generated by these models for particular types of investments were based on incorrect assumptions.
By contrast it is relatively difficult to identify or assess levels of operational risk and its many sources. Historically organizations have accepted operational risk as an unavoidable cost of doing business. Many now though collect data on operational losses - for example through system failure or fraud - and are using this data to model operational risk and to calculate a capital reserve against future operational losses. In addition to the Basel II requirement for banks, this is now a requirement for European insurance firms who are in the process of implementing Solvency II, the equivalent of Basel II for the banking sector.
Read more about this topic: Operational Risk
Famous quotes containing the word difficulties:
“So far as my experience goes, travelers generally exaggerate the difficulties of the way. Like most evil, the difficulty is imaginary; for what’s the hurry?”
—Henry David Thoreau (1817–1862)
“Have you noticed when reading War and Peace the difficulties Tolstoy experienced in forcing morally wounded Bolkonsky to come into geographical and chronological contact with Natasha? It is very painful to watch the way the poor fellow is dragged and pushed and shoved in order to achieve this happy reunion.”
—Vladimir Nabokov (1899–1977)
“All human beings hang by a thread, an abyss may open under their feet at any moment, and yet they have to go and invent all sorts of difficulties for themselves and spoil their lives.”
—Ivan Sergeevich Turgenev (1818–1883)