Securing Tomorrow: An Operational Risk Capital Cushion Perspective

Abstract

This paper aims to conduct an in-depth analysis of commercial banks of Pakistan dealing operational risk, whose internal frameworks have been in place but in its early stages and lack consistency to provide the desired level of assurance to both management and regulators. Additionally, the paper is driven by the need of exploring and assessing the operational risk capital cushion in the light of Basel recommendations to pave way for further studies crucial for the survival of banks and that too in the context of a developing country which is rare in literature. Keeping in view of exploratory nature of the research, the strategy falling in the realm of qualitative research has used primary data from face to face interviews of risk managers analysed with the help of thematic analysis. The study finds a consistency considering the recommendations of Basel II of using only "basic indicator approach" for calculating operational risk cushion in Pakistan whereas Basel III recommendation of having a standardize approach to use across all banks is still a long road ahead while managers are unaware of the numbers their banks were keeping as a capital cushion which itself is a big risk.