Posts - Integrating the
Model in the Real

1/13/09: Audit & Risk - Seeing the Forest from the Trees

9/4/08: Security ROI

6/28/08: Boise: A
Terrorist Target?

5/10/01: FFIEC Business
Continuity Planning

4/3/08: SOX 404 Audits

Basel II Accords

Over the past two decades the financial services industry has made significant progress in identifying and quantifying market, credit and liquidity risks. As part of this evolution, the first Basel Capital Accords (1988) established international financial requirements for capital - to - risk weighted asset ratios for credit risk. However, during the same period a number of financial institutions suffered losses in excess of $1 billion due to failures in their internal controls (e.g., Long Term Capital Management, Drexel Burnham Lambert, Bank of Credit and Commerce, Daiwa Bank, Barings, Prudential Securities, Inc. and JPMorgan Chase). Based on these events The Basel Committee re-examined the Accords and noted, “Deregulation and globalization of financial services, together with the growing sophistication of financial technology, are making the activities of banks and thus their risk profiles … more complex. Developing banking practices suggest that risks other than credit, interest rate and market risk can be substantial.” As a result the Basel II Accords require major international financial institutions to implement formal programs that measure and control Operational Risk and to take reserves on their books for the related losses.

Recent events relating to the multi-billion dollar trading losses at Societe Generale (which were based on the failure of a multitude of operating controls) and the financial turmoil created by the gross misjudgment of the risks relating to sub-prime mortgages place the Basel II Accords in question. There is a strong implication that we still have not identified an effective, reliable means of identifying and prioritizing operational risk.