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from high frequency and low severity risks and instead focus more on the low frequency and high severity risk. Risk identification process includes risk-ranking components where these ranking are usually based on impact, severity or dollar effects (Barton et al. 2002). According to him, the analysis helps to sort risk according to their importance and assists the management to develop risk management strategy to allocate resources efficiently.

2.3. Operational Risk

Operational Risk is one of the important arms of the risk management triangle -the other two being Credit Risk and Market (Treasury) Risk. Any organization, particularly in the banking sector, is squarely exposed to operational risks emanating within or outside the organization (Levine and Hoffman, 2004).

There was no precise definition of operational risk until Basel Accord II came into being in June 2004. Furthermore, for the first time in the history of global banking, operational in capital charge has been made a mandatory requirement in banking. This certainly puts in a lot of stress and strain on a bank's management.

Operational Risk is also known as Transaction Risk in some countries in order to efficiently face this new challenge in risk management, the prerequisites are -creation of risk culture and enterprise wide operational risk awareness. Proactive steps at all the levels of operation will operate as a safety value and in the process, may facilitate lower risk capital charge (Bagchi, 2006).

As it has been mentioned that until the release of Basel Accord II in June 2004, there was no universal definition of operational risk in banking (Anna et al., 2007) . It was generally believed that as ‘risk' would mean loss in any event or transaction, any risk other than credit risk and market risk would have to be reckoned as an operational risk, without the need of creating any separate identity for such risk. However this way of looking at operational risks is dangerously vague. Prof Hans Geiger, an international authority on risk management, has viewed operational risk from a direct angle and an indirect angle as under:

Indirect Angle: “Operational risks are all those risks which cannot e classified as credit risk or market risk.”

Direct Angle: “Operational risk is an expression of the danger of unexpected direct or indirect losses resulting from inadequate or failed internal processes, people and systems and from external events.”

Basel Accord II has laid down the following definition for adoption by the countries and hence this should be treated as a standard definition of operational risk:

Operational risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk but excludes strategic and reputation risk.” (Bagchi, 2006)

2.3.1. Reasons for Increasing Focus on Operational Risk Management

* On - going spate ( sudden trend flow) of financial deregulation procedures due to globalization.

* Influence of technology and automation in managing business with other side effects.

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