Title:
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Operational risk management : determination of causal relationships and interdependencies of operational risk events
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The Basel II capital adequacy framework constitutes a very comprehensive regulatory
approach to risk assessment in banks. A special feature of this new accord is that it is
not only targeting banks' financial risk exposures in terms of credit risks and market
risks, the scope has been widened to also explicitly incorporate banks' exposure to
operational risks in the capital adequacy requirement. For banks this novelty means a
major change. Unless they choose to use the highly unsophisticated basic indicator
approach or the standardized approach proposed in the new Basel accord, it will put
significant pressure on them to develop and design appropriate internal risk
management frameworks and systems. This research explores banks' operational risk
mitigation under Basel II in Nigeria.
The overall aim is to propose, test and validate a detailed framework for operational
risk mitigation and to determine the causal relationships and interdependencies of
operational risk events. The research utilised information derived from qualitative risk
analysis, questionnaires and interviews administered to operational risk experts
selected from Nigerian banks. The data analysis used `Statplus' an excel based
software for the determination of variances and correlations.
The first category of findings revealed that (1) Nigerian banks do not have adequate
frameworks to mitigate risks (2) the banks do not monitor key- risk indicators within
their business lines and thirdly (3) there is no structured approach to operational risk
management within Nigerian banks. The second category of findings from expert
opinion suggested a significant relationship between individual key risks and
operational loss events. The results also confirmed a relationship between a bank's
overall approach to risk management, and its strategic objectives on risk mitigation
given the interdependence of operational risk factors and sub-factors.
The framework proposed, tested and validated in this research is both diagnostic and
predictive in its approach to operational risk mitigation. It is expected that this
framework will fill the gap which is existing within the Nigerian financial sector in
terms of an adequate framework for operational risk mitigation.
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