Of all the different types of risk, which can affect firms, Operational Risk can be among the most devastating and the most difficult to anticipate. Operational Risk continues to receive heightened attention among market participants and regulators, prompting dialog and debate on the best ways to identify, measure, and manage this important risk.

In response to these developments, the Operational Risk Committee of the IAFE was formed in 2000. Its mission is to promote discussion among members, the risk management, and investment communities in order to further understanding, share best practices and promote industry standards regarding Operational Risk.

The committee's mandate is to explore Operational Risk in its broadest sense. Examples of topics which may be considered by the committee include best practices, quantification, corporate governance, technology applications, effectiveness of existing controls, and the interrelationship of Operational Risk to other forms of risk.

The activities of the committee are multi-faceted, shaped by the interests and energies of its members. Specific initiatives include but are not limited to panel discussions, seminars, workshops, white papers, surveys, and research projects.

Although the proper definition of Operational Risk has often been the subject of past heated debate, there is general agreement among risk professionals that the definition should, at a minimum, include breakdowns or failures relating to people, internal processes, technology or the consequences of external events. Operational Risk is a broader concept than ´operations´ or back office risk. It encompasses risk inherent in business activities across the firm and, consequently, its losses have the potential to be of much greater magnitude.

The committee is comprised of individuals with a range of backgrounds, including dealers, end-users, industry advisors, operational risk specialists, technologists, regulators, scholars and others. Members serve on this committee as individuals who have an interest in operational risk, rather than as representatives of their respective employers or affiliated organizations.


What is Operational Risk?

Although the proper definition of Operational Risk has often been the subject of past heated debate, there is general agreement among risk professionals that the definition should include breakdowns or failures relating to people, internal processes, technology or the consequences of external events. Operational Risk is a broader concept than ´operations´ or back office risk. It encompasses risk inherent in business activities across an organization and its losses have the potential to be of much greater magnitude. According to one database of operational risk loss events, the total amount of losses in the financial services industry is in the range of $400 billion over the past ten years. This amount is based on events in the public domain and is estimated to be perhaps just 10% of the total loss amount.

As an organization, we accept the Basel Committee´s definition of operational risk for purposes of quantification and capital allocation:

´the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.´

This definition, however, was never intended to serve as a guidepost for operational risk management or best practices. As a committee we believe that operational risk is a broader discipline, and recognize that there are components of operational risk that underlie all other risks, and have significant impact on market and credit risk events. We also recognize that a financial institution´s primary goal is not to measure operational risk for the regulators, but to manage its reputation and brand. For this reason, we also include issues of reputation, strategy, and corporate governance as part of our definition.

As a committee we are dedicated to defining and instigating operational risk in the broadest sense of the word and are committed to a definition that will address fundamental and strategic issues that are of highest priority to the financial services community.