The Basel Committee on Banking Supervision (BCBS) has defined operational risk (OR) as the risk of loss resulting from inadequate or failed internal processes, people and systems from external events. This definition includes legal risk, but excludes strategic and reputational risk. Traditionally, individual OR management has been an important part of financial institutions’ efforts to avoid frauds and to keep the integrity of internal controls, among other aspects. Nevertheless, what is quite new is the fact of considering OR management as a comprehensive practice similar to the management of other risks (such as credit or market risk), and the measurement of losses due to OR events and the requirement of regulatory capital. Considering OR as an inclusive risk category, the BCBS has outlined a set of sound practices for the management and supervision of this risk. This document analyses those sound practices and their application in internationally active banks. A sample of Latin American countries which have published regulations on sound practices about this matter, is analyzed. It has to be emphasized that many countries in the region have established regulations in order to promote the adoption of OR management structures based on BCBS principles.
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