Which aspect of risk did the Basel II Accord begin to address?

The Basel II Accord significantly advanced the framework for banking regulation by incorporating a comprehensive approach to managing various types of risks faced by financial institutions. One of the key aspects that the Accord sought to address was operational risk.

Operational risk refers to the potential for loss resulting from inadequate or failed internal processes, people, systems, or external events. Prior to Basel II, regulatory frameworks primarily focused on credit risk and market risk, often neglecting the implications and potential financial impact of operational failures. Basel II introduced a structured methodology for banks to identify, assess, monitor, and manage operational risk more rigorously.

By explicitly incorporating operational risk into the regulatory capital framework, Basel II aimed to ensure that banks hold sufficient capital reserves to cover potential losses arising from this type of risk. This was a critical evolution in the regulatory landscape, recognizing that operational failures can be just as detrimental to financial stability as issues arising from credit and market risks. As a result, it positioned operational risk as a fundamental component of a bank's risk management strategy and contributed to overall systemic financial stability.