6533b7cffe1ef96bd12580af

RESEARCH PRODUCT

THE TOLERANCE AND OPERATIONAL RISK APPETITE IN BANKING

subject

description

Operational risk appetite is an area that attracts differing views among practitioners. In theory, accepting any type of risk may carry some aspect of reward but it is important for operational risk practitioners to be aware of the view that this risk type differs from, for example, credit risk and market risk. Operational risks may be inherent in operational activities but are rarely intentionally sought and have no material upside in terms of return/income generation. There are, however, cost/benefit decisions involved in defining an appropriate balance between accepting potential losses on the one hand and incurring costs of mitigation on the other.In simple terms, the expression of the appetite towards the operational risk for a bank could be achieved by establishing, for each type of risk, what is acceptable, what is unacceptable and the range between these parameters is what is tolerable.In this respect, from the presented aspects in this work, we intended to create a `best practices` set to guide the concrete activities of implementing an efficient and effective management of operational risk in accordance to the risk profile adopted by the banking institution.