U.S. supervisory standards for operational risk management

The U.S. bank supervisory agencies recently issued for public comment revised guidance regarding the implementation of the proposed Basel II-related, risk-based capital requirements. Among the revisions is an important update to guidance regarding operational risk management. Operational risk generally refers to the risk of monetary losses resulting from inadequate or failed internal processes, people, and systems, or from external events, such as natural disasters. ; For other dimensions of risk, such as credit and market risk, the Basel II framework includes considerable detail on using economic models for quantifying risk exposures. However, operational risk is a relatively new field, so understandably financial institutions have made less progress in developing formal models for it. Therefore, the supervisory agencies have emphasized standards regarding robust systems for operational risk management among banking organizations. This Economic Letter reviews key components of the U.S. supervisory standards proposed in the recent guidance and of recent survey data regarding how operational risk management systems are being implemented worldwide.