What is Operational Risk?

1. What is operational risk? How does it differ from market and credit risk?

2. What are the key elements of a risk management system?

3. How does a "high frequency, low impact" event differ from a "low frequency, high impact" one regarding the potential loss a bank is exposed to and how the bank models expected future losses?

4. In general, what steps might a bank take to lower its risks?

5. What regulatory changes by the Basel Committee on Banking Supervision are suggested to help manage operational risk?

Source: "What is Operational Risk?" Jose A. Lopez, Federal Reserve Bank of San Francisco FRBSF Economic Letter, No. 2002-02, January 25, 2002, pp. 1-2.