Sound Practices for the Management and Supervision of Operational Risk

Note: This consultative document has been superseded by Sound Practices for the Management and Supervision of Operational Risk (Basel Committee Publications No. 96, February 2003)

Introduction

The purpose of this paper, prepared by the Risk Management Group of the Basel Committee on Banking Supervision, is to further the Committee's dialogue with the industry on the development of Sound Practices for the Management and Supervision of Operational Risk. The paper outlines a set of principles that provide a framework for the effective management and supervision of operational risk, for use by banks and supervisory authorities when evaluating operational risk management policies and practices. The Committee recognises that the exact approach for operational risk management chosen by an individual bank will depend on a range of factors, including its size and sophistication and the nature and complexity of its activiti es. However, despite these differences, clear strategies and oversight by the board of directors and senior management, a strong internal control culture (including, among other things, clear lines of responsibility and segregation of duties), effective internal reporting, and contingency planning are all crucial elements of an effective operational risk management framework for banks of any size and scope

The consultative paper was originally published in December 2001. The Committee is grateful for the many insightful comments received from institutions, industry associations, supervisory authorities, and others, and notes that these comments have played a substantial role in the redrafting of this paper. Due to a number of important changes to the Sound Practices incorporated in this revised draft, the Committee has decided to release the paper for a second, short period of consultation before finalisation. The Committee would therefore welcome comments on the revised principles outlined in this paper. These comments should be submitted to relevant national supervisory authorities and central banks and may also be sent to the Secretariat of the Basel Committee on Banking Supervision at the Bank for International Settlements, CH-4002 Basel, Switzerland by 30 September 2002. Comments may be submitted via email: BCBS.capital@bis.org or by fax: +41 61 280 9100. Comments on this paper will not be posted on the BIS website.