Risk Management, as a general concept for banking, entails a huge array of factors, many of which are either marginally addressed or are rarely considered as elements of an integrated enterprise process. The Basel II approach to managing capital reserves is evolving as a standardized international method for calculating the capital charge. Within the Basel guidelines risk management is described as including credit risk, market risk and operational risk. While credit risk measures risk associated with credit-based assets; market risk measures the risks associated with existing and anticipated interest rates. Both credit and market risk involve data analysis that is quantifiable. Operational risk is the third part of the concept and this area includes a variety of different types of risks that are less structured and quantifiable.

Among these risks are: internal fraud; external fraud; employment practices and workplace safety; clients, products and business practices; damage to physical assets; business disruption and systems failures; and, execution, delivery and process management. This range of risks includes some for which measurement is more subjective and qualitative, like employment practices. Other risks, such as fraud or clients, products and business practices are much more measurable in objective and quantifiable terms.

The graphic below shows the relationship of the three different risk categories to the overall risk framework:

THE RISK MANAGEMENT FRAMEWORK