The Trickle-Down Effect of Basel II

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Letter Writer:

Samia Kamel, an assistant vice president at a bank in Cairo, Egypt

Date Posted:

Feb. 2 , 2007

Letter:

After reading this article and others related to operational risk measurement under the Basel Accord, my question is, how can the growth of a bank be an operational risk? Is this the case when we have too much growth, i.e., actual growth is more than sustainable growth? And is it possible to control this risk by calculating the sustainable growth of the bank and comparing it to actual growth to determine if there is potential operational risk? Thank you.

Response:

(This response is from William Emmons, one of the co-authors of the article.)

Growth of a bank's assets itself is not what we mean by operational risk, which is defined as "the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events." The connection between the two (bank growth and operational risk) is that a bank's rapid growth might make it more difficult for the bank to maintain adequate internal-control processes or enough competent, well-trained staff. In that case, the bank would be more vulnerable to experiencing operational losses.

As for comparing a bank's actual growth to its "sustainable growth," one indirect approach would be, in fact, to track operational losses. If the frequency or severity of a bank's operational losses—for example, instances of employee fraud, computer breakdowns, or other failures to meet or follow normal operating procedures—increases when the bank's growth rate increases, one might conclude that the bank is growing faster than its "sustainable rate."

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