Legal risk

Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and that, in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations. Basel II classified legal risk as a subset of operational risk in 2003. This conception is based on a business perspective, recognizing that there are threats entailed in the business operating environment. The idea is that businesses do not operate in a vacuum and that, in the exploitation of opportunities and their engagement with other businesses, their activities tend to become subjects of legal liabilities and obligations. One of the primary reasons why legal risk is associated with operational risk involves fraud since it is recognized as the most significant category of operational loss events and considered to be a legal issue as well. These, however, do not mean that legal risk is only confined to this conceptualization because it is defined in more than way. For instance, there are specific sets of legal risks that are defined by the European Union (EU) Law. In 2005, the European Central Bank declared that it will develop its own legal risk definition to help 'facilitate proper risk assessment and risk management, as well as ensure a consistent approach between EU credit institutions.'