Difficulties
It is relatively straightforward for an organization to set and observe specific, measurable levels of market risk and credit risk because models exist which attempt to predict the potential impact of market movements, or changes in the cost of credit. It should be noted however that these models are only as good as the underlying assumptions, and a large part of the recent financial crisis arose because the valuations generated by these models for particular types of investments were based on incorrect assumptions.
By contrast it is relatively difficult to identify or assess levels of operational risk and its many sources. Historically organizations have accepted operational risk as an unavoidable cost of doing business. Many now though collect data on operational losses - for example through system failure or fraud - and are using this data to model operational risk and to calculate a capital reserve against future operational losses. In addition to the Basel II requirement for banks, this is now a requirement for European insurance firms who are in the process of implementing Solvency II, the equivalent of Basel II for the banking sector.
Read more about this topic: Operational Risk
Famous quotes containing the word difficulties:
“I often think that all the difficulties we encounter only give us the more strength if we keep hold of our work, and we must not now give up while in the prime of life. It is best to keep trying, and by and by the opportunity will come. If we have given up, then we shall not be ready for it when it does come.”
—Ellen Henrietta Swallow Richards (1842–1911)
“The intellectual life may be kept clean and healthful, if man will live the life of nature, and not import into his mind difficulties which are none of his.”
—Ralph Waldo Emerson (1803–1882)
“So far as my experience goes, travelers generally exaggerate the difficulties of the way. Like most evil, the difficulty is imaginary; for what’s the hurry?”
—Henry David Thoreau (1817–1862)