Operational Risk Management

Abstract: The financial crisis has led to reconsider how financial institutions manage their risks. Despite for the recognized importance of operational risk, credit and market risk have attracted most of the attention so far. This paper argues that managers at business unit levels are responsible for managing operational risk but have little guidance. Regulators direct their efforts at the corporate level and the academia focuses on quantitative approaches. As a result of the lack of guidance, operational risk management emerges as a pragmatic and reactive process. Additionally, although regulators stress the importance of independent control, the paper recognizes business embeddedness as a critical feature for the successful management of operational risk at the business unit level. Last but not least, the results show that operational risk management is often associated to the issue of bureaucratization.