2.1.4.2 Framework for assessing the risk profile of investment firms

110. To fully assess the risk profile of investment firm, this study will analyse the risk profile of investment firms and the requirements applied by European legislators on the following dimensions: investment firms can be subject to operational risks and to financial risks. Which in turn could lead to a systemic risk for the investment firm.

111. Operational risks can be defined as “failure of people, processes and technology in the course of regular business operations, such as breaches in internal controls and monitoring, internal and external fraud, legal claims or business disruptions and improper business practices”.1 The operational risks to which an investment firm can be exposed when performing investment services or activities have been discussed in Section 2.1.2.

112. Financial risks cover all credit and market risks an investment firm can be exposed to when performing investment services or activities. These risks will primarily be relevant for those investment firms that deal on own account, perform underwriting services or that grant (investment) credit.

113. Systemic risk should be used to further refine the operational risk and financial risk dimensions. To fully assess the risk profile of an investment firm, one also has to assess whether the investment firm might pose a systemic risk, which will be closely linked to the amount of financial risk to which the investment firm is exposed but should also capture other aspects.