Operational Risk – Challenges for Banking Industry

Abstract

Operational risk covers wide range of events that either produce no effect on financial result of the institution or can strongly harm it. Although it is present in the banking activity from its origins, industry interest increases during last decades of XX century. Basel II gave significant incentives in managing operational risk processes in banks all over the world. New, Basel III regulation imposes improvement in operational risk management indirectly, through guidelines for better management of liquidity and credit risk, thus emphasizing the importance of the most intangible factors of operational risk – internal factor contained in inadequate processes and procedures. In Serbian banking system the most important contribution of Basel standard implementation was raising awareness of the presence of this kind of risk, although it is still in the initial phase. High impact on the operational risk drivers has macroeconomic environment, banking system structure and client type that are offered financial support. Having in mind that banks offers in Serbia are primarily oriented toward retail clients, it is not surprising that the most important factor of operational risk, regarding number of risk events, are human errors with 54% in total. However, majority of financial losses are derived from clients’ frauds, more than 70%. In this paper, author indicates the most important factors and events of operational risk that are present in retail banks in Serbia and their sources as a key element in mitigating their negative effects in the future.