What has asbestos, mesothelioma and the legal
risk to do with Basel ii compliance?
Basel ii and Legal Risk Research project -
Compliance LLC
B. Basel ii and
Legal Risk
Basel ii Accord
Section 644 to 651: V. Operational
Risk
A. Definition
of operational
risk
"644.
Operational risk is defined as the risk of loss
resulting from inadequate or failed internal
processes, people and systems or from external
events. This definition includes legal risk, (97) but excludes strategic and
reputational
risk.
(97) Legal risk
includes, but is not limited to, exposure to
fines, penalties, or punitive damages resulting
from supervisory actions, as well as private
settlements. "
The huge problem in
Basel compliance... we have to MEASURE legal
risks... and ALLOCATE CAPITAL for legal
risks...
It is nearly
impossible... but banks and financial
organizations will try hard to
"guess".
The second important
problem... there is no definition of legal risk.
In fact, in Basel there is always a confusion
between legal and other operational risk.
According to the Basel committee,
these are some of the
risks:
-
internal
fraud
-
external
fraud
-
employment practices leading to
workers’ compensation claims or other forms of
liability
-
client, product and business
practice issues
-
fiduciary
breaches
-
improper
trading
-
money
laundering
-
sales of unauthorised
products
-
collateral management
failures
-
incomplete legal
documentation
-
unapproved access to client
accounts
Are these risks legal or
operational?
We can see that all are legal risks
with huge possible operational costs, but
the Basel committee did not try to to draw a
distinction between legal or operational risk.
The third
important problem...
there are several legal aspects to
market risk, credit risk, strategic and
reputational risk. The Basle ii Accord
includes legal risk in the context of operational
risk. Banks have to be careful
there.
HOW CAN WE MEASURE
LEGAL RISK?
We can not. But this
is not a "correct" answer. We will try to find
another one, a correct
answer.
There are three approaches to the
measurement of operational risk in Basel.
1. The ‘basic’ approach, simply applies a
standard percentage to a
measure of the income of the firm as a
whole.
It is an easy way to "measure" legal
risk.
2. The ‘standardised’
approach, is very similar. Now we do not have one
percentage for all the organization... but
different percentages to different business lines.
3. The sophisticated ‘advanced measurement
approach’... we have to add
the amount of "expected loss" and the amount of
"unexpected loss" (it
is unexpected loss... but it is expected that we
can measure it... using
models)
We have to allocate
capital for a risk that is so difficult to
measure...
There are also
differences from country to
country.
What has asbestos, mesothelioma and the legal
risk to do with Basel ii compliance?
Basel ii and Legal Risk Research project -
Compliance LLC
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