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Operational risk as a risk type has been in use by regulators since Basel II.[33] This risk type – along with the financial risk types of credit risk and market risk – is still the basis for the capital requirements calculation of the Basel framework’s first pillar. According to the BCBS, 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 but excludes strategic and reputational risk.”[34]

In Europe, the PRA makes use of the Basel definition. For the special case of funds, the FCA uses one further specification by stating that it includes “legal and documentation risk and the risk resulting from the trading, settlement and valuation procedures operated on behalf of the fund.”[35] The EBA and the Central Bank of Ireland use definitions in line with the Basel definition.

Both in the US (Federal Reserve Bank of New York and FDIC) and in Canada (OSFI), the regulators use the Basel definition. In Asia-Pacific, the APRA also uses the Basel definition. Therefore, for the purpose of this book, we use the Basel definition of operational risk.