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:
“Our achievements speak for themselves. What we have to keep track of are our failures, discouragements, and doubts. We tend to forget the past difficulties, the many false starts, and the painful groping. We see our past achievements as the end result of a clean forward thrust, and our present difficulties as signs of decline and decay.”
—Eric Hoffer (1902–1983)
“It appeared that he had once represented his tribe at Augusta, and also once at Washington, where he had met some Western chiefs. He had been consulted at Augusta, and gave advice, which he said was followed, respecting the eastern boundary of Maine, as determined by highlands and streams, at the time of the difficulties on that side. He was employed with the surveyors on the line. Also he called on Daniel Webster in Boston, at the time of his Bunker Hill oration.”
—Henry David Thoreau (1817–1862)
“I often think that all the difficulties we encounter only give us the more strength if we keep hold of our work, and we must not now give up while in the prime of life. It is best to keep trying, and by and by the opportunity will come. If we have given up, then we shall not be ready for it when it does come.”
—Ellen Henrietta Swallow Richards (1842–1911)