Since the Basel II discussions began in the late 1990s, there has been a tremendous increase in research on operational risk, including the forms it can take, the ways in which it arises, measurement methods and techniques to mitigate the risk. As a result, the industry has witnessed a surge of innovation and development in these areas.
Second, with respect to stressed conditions, Basel II seeks to advance comprehensive stress testing frameworks and risk management practices more generally. Strong risk management is a critical component of a bank’s ability to withstand shocks. The Basel II framework requires that stress scenarios capture the effects of a downturn on market and credit risks, as well as on liquidity.