Operational risk management for financial institutions

I have been a regulator now for nine years. But for many years before that, in an explicitly non‐regulatory career at the Bank of England, I was very conscious of the efforts being made ‐ especially between the Bank and the Federal Reserve ‐ to get a dialogue under way in what bankers now know as the Basel Committee. Founders of that Committee, such as George Blunden, no doubt watched in a mixture of awe and horror at the subsequent growth of the animal they helped to create. When Basel 1 was being formulated in the mid‐1980s, there was, of course, a widespread recognition that there were many different reasons why a bank could fail. But there was a general and accurate perception that credit risk was the primary threat. An ‘adequate’ amount of capital and the division of assets into a relatively modest number of credit risk buckets were seen as a truly significant step forward. And as to what was ‘adequate’ capital, I am told that 8 per cent was arrived at as the highest number they dared to think they could get agreement on. It did not fall out (nor could it have fallen out) of any complicated mathematical formula or extensive historical research.