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Operational Risk According to Basel II Requirements:

A Study of its Nature and Management in the Case of Banks Operating in Palestine
Abstract
The banking system incorporates various risks that require taking precautions and adequate
procedures to manage and control these risks according to the best know international practices in
order to mitigate potential risk exposures or avoid them. Operational risk is considered to be one
of the most vital banking risks specially when taking into consideration the technological
advancements in the banking activities, and deregulations, and globalization.
As a result of the increasing financial crisis in countries around the globe that resulted in the
collapse of many reputable international banking institutions, which was a result of the inadequate
managing and controlling the operational risk in addition to other risks. In this context, the Basel II
accords was introduced in the year 2001, and made a major impact on the banking supervision and
new concept in risk management. Where capital requirements were among the major additional
requirements for facing operational risks, the Basel committee issued a paper titled "Sound
Practices for Management and Supervision Operational Risk" in 2003 that reflected the ongoing
debate between the Committee, Banks, and the Supervisory agencies throughout the world.
As in the case of all banks in emerging countries that are not fully capable of implementing the
Basel II accords, the banks in Palestine must be aware of the significance of configuring an
internal environment in accordance with the best practices and international standards in managing
and controlling banking risk in general with emphasis on operational risk, due to the fact that it is
a cornerstone to implement the Basel II accords.
The study at hand aims to identify the operational risks, generally, and the method of calculation
the capital requirements for operational risks and identifying the scope of operational risk that
threatens the banks in Palestine. In addition, the capability of banks to deal and manage this issue
in accordance with sound practices. Hence, the readiness of the banks in Palestine to implement
the requirements of Basel II that are related to operational risks.
This study was conducted through a methodology that incorporated two major elements: the first,
conducting a comprehensive review of the literature that is related to risks in general, and
operational risk in specific, with the emphasis on the related Basel Committee recommendations
on Basel II and the sound practices for managing and controlling operational risk; the second, was
based on the empirical results through a questionnaire that was dispersed among banks, and
4

analyzing the results in order to reach to an actual understanding of banks' methodology and
concept of managing and controlling operational risk.
Generally, the study has revealed that the commitment level of banks that operate in Palestine is
relatively low when it comes to sound practices, due to the fact that most banks do not have posses
the adequate levels of core requirements for such practices, which reflects a negative outlook for
the readiness to commit to the Basel II requirements.

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- . .II .(2004) . .
. .II .(2005) . . -
. II .(2005) . .
.2002 ( 2) . . .
. .(2002) . .-

-Basel Committee on Banking Supervision, (2001), Regulatory Treatment of
operational risk.
-Basel Committee on Banking Supervision, (2003), Sound Practices for the
management and Supervision of Operational Risk.
-Basel Committee on Banking Supervision, (2004), International Convergence
of Capital Measurement and Capital Standards (A Revised Framework).
-Basel Committee on Banking Supervision, (2004), Implementation of Basel II:
Practical Considerations.
-Basel Committee on Banking Supervision, (2004), Principles for the homehost recognition of AMA operational risk capital.

35

-Basel Committee on Banking Supervision, (2003), High-level principles for

the cross-border implementation of the New Accord.
-Basel Committee on Banking Supervision, (2003), Overview of the New Basel
Capital Accord.
-Basel Committee on Banking Supervision, (1996), Part B of the Amendment
to the Capital Accord to Incorporate Market Risks.
-Basel Committee on Banking Supervision, (2001), Principles for the
Management and Supervision of Interest Rate Risk.
-International conference of Banking Supervisors (Sep 2004), Madrid.
-Henring, Richard. (2004), The Basel II Approach to Bank Operational Risk.
University of Pennsylvania.USA. www.en.wikipedia.org
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