Methods of Operational Risk Management
Basel II and various Supervisory bodies of the countries have prescribed various soundness standards for Operational Risk Management for Banks and similar Financial Institutions. To complement these standards, Basel II has given guidance to 3 broad methods of Capital calculation for Operational Risk
- Basic Indicator Approach - based on annual revenue of the Financial Institution
- Standardized Approach - based on annual revenue of each of the broad business lines of the Financial Institution
- Advanced Measurement Approaches - based on the internally developed risk measurement framework of the bank adhering to the standards prescribed (methods include IMA, LDA, Scenario-based, Scorecard etc.)
The Operational Risk Management framework should include identification, measurement, monitoring, reporting, control and mitigation frameworks for Operational Risk.
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