Operational Risk Control with Basel II in Indonesian Banking

Abstract

We examine howthe importance of operational risk control in a bank is an important feature of management practices in the modern money market. Serious operational risks include damage to internal control and corporate governance, which can result in financial losses through fraud, misconduct, and failure of performance of an institution. The design of this study uses a literature review approach on operational risk control with Basel II. The methodology is carried out with a concise review of some previous research, so that it can be concluded in a concise and detailed manner without conducting data testing. The results of the literature review show that the Basel Committee on Banking Supervision has proposed three cutting-edge approaches in dealing with operational risks, namely basic indicator approach, standardized approach, and advanced measurement approach.The improvement of operational risk control in banks is regulated in the Framework of Basel II, a new capital adequacy regulation proposed by the Basel Committee on Banking Supervision. (BCBS). Basel II will apply to internationally active banks and to all banks and investment firms in Indonsia through the transposition of the new Directive into national regulations. By implementing this Basel II approach, banks will be able to reduce operational risks, which will help them in a better intermediation process.The Framework of Basel II has been adopted by Bank Indonesia through regulation No. 5/8/PBI/2003 concerning the Application of Risk Management for Commercial Banks so that Indonesian banks can operate more carefully and their implementation is adjusted to the objectives, business policies, size and complexity of business and the bank's capabilities in terms of finance, supporting infrastructure and human resources. With this provision, the bank is expected to be able to carry out all its activities in an integrated manner in an accurate and comprehensive risk management system.