Operational Risk Management
Written by an experienced academic and practitioner, Operational Risk Management fills a gap in the information available on the Basel 2 Accord and offers valuable insights into the nature of operational risk.
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OPERATIONAL RISK MANAGEMENT
Also by Imad A. Moosa INTERNATIONAL PARTY CONDITIONS EXCHANGE RATE FORECASTING FOREIGN DIRECT INVESTMENT INTERNATIONAL FINANCIAL OPERATIONS EXCHANGE RATE REGIMES
Operational Risk Management
Imad A. Moosa Professor of Finance Monash University
© Imad A. Moosa, 2007 Softcover reprint of the hardcover 1st edition 2007 978-0-230-50644-2 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2007 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-35295-1 ISBN 978-0-230-59148-6 (eBook) DOI 10.1057/9780230591486 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 16
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To Nisreen and Danny
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Contents
List of Figures
x
List of Tables
xiii
List of Abbreviations
xiv
Preface
xvi
1. The Science of Risk Management
1
1.1
Definition of Risk
1
1.2
Risk Measurement
4
1.3
The Taxonomy of Risk
12
1.4
What is Risk Management?
19
1.5
What is Next?
25
2. The Basel Committee, Basel I and Basel II
26
2.1
The Basel Committee
26
2.2
Some Preliminaries
30
2.3
The Basel I Accord
33
2.4
The Basel II Accord: An Introduction
37
3. The Pillars of the Basel II Accord
42
3.1
Introduction
42
3.2
Pillar 1: Credit Risk
42
3.3
Pillar 1: Market Risk
44
3.4
Pillar 1: Operational Risk
46
3.5
Pillar 2
56
3.6
Pillar 3
57 vii
viii
CONTENTS
3.7
A Critical Evaluation of Basel II
59
3.8
Implementation of the Basel II Accord
69
3.9
What is Next?
73
4. The Concept of Operational Risk
75
4.1
An Anecdotal Description of Operati
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