OpR Expert Group Recommendation on the Definition of Operational Risk

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Preliminary remark
In its mandate the
OpR
Expert Group set itself the task of drawing up proposals for how the latitude that exists in the national implementation of the Basel and Brussels rules on operational risk might be utilised. The following Expert Group recommendation is a suggestion for the definition of operational risk. The recommendation is subject to its being consistent with the decisions taken at the European level.

03.11.2008

Section 269 of the Solvency Ordinance (as of 01.01.2007)
Approaches to determining the capital requirement for operational risk Operational risk means the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. 2This definition shall include legal risk.

Explanatory comments
Strategic risk and reputational risk are not part of operational risk. Legal risks within the meaning of the risk of losses as a result of infringements of legal provisions in force are part of operational risk. These include the risk of suffering losses on transactions concluded in the past because of a subsequent change in the legal situation (change in case-law or amendment of legislation). The risk of having to change future business activities because of changes in the legal situation is not to be regarded as operational risk. Operational risk comprises the risk of losses manifesting within the institution itself. Losses occurring within a service provider with whom an agreement regarding the outsourcing of activities has been concluded are not operational risk if the losses have no effect on the institution. Operational risks in this context are losses that arise in the institution as a result of the service provider failing to provide the service properly or failing to provide it at all. In this instance the legal risk of the outsourcing agreement itself also needs to be taken into account.

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