Physical Damage

From Open Risk Manual

Definition

Physical Damage (Also Damage to Physical Assets and Systems Risk) is the risk of unexpected financial or reputational loss from damage to physical assets owned or operated by the firm, ranging from natural disasters or other events

It is a recognized risk category in regulatory frameworks worldwide (Basel II standards).

Basel Level 2 & 3 Event Type Classification

  • Disasters and other events
    • Natural disaster lossess
    • Human losses from external sources (terrorism, vandalism)

Examples by Business Line

Types of physical damage vary by business line. An indicative list:

  • Trading and Sales: Business continuity failure, damage to building and premises
  • Retail Banking: Fire, floods, damage to building and premises
  • Commercial Banking: Damage to building and premises, Natural disaster
  • General: Natural disaster, Terrorist attack, Earthquake

Mitigation

Risks in this category can be mitigated by continuity plans, safety procedures and related employee training. Losses can also be mitigated by insurance policies

Issues and Challenges

  • As with all operational risks, difficult to obtain objective measures of actual risk, both before and after the application of controls

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