The Management Of Legal Risk By Financial Institutions

As is now well known, the new proposals for the regulation of banks put forward by the Basle Committee on Banking Supervision (BCBS) known generally as Basle II, place much greater emphasis on operational risk as an issue for banks in the context of regulation than any previous regulatory regime. This has been stimulated by a number of things, including the alarming number of major frauds which have been suffered by banks in recent years, giving rise to very significant losses and in at least one case, the financial ruin of the institution itself. Operational risk is only loosely defined in the proposals, but it is clear that it is intended to include legal risk, a concept for which no definition has been provided at all. This paper is concerned with how institutions might implement the management of legal risk under the new regulatory regime.