Legal risk

Basel II classified Legal risk as a subset of Operational Risk in 2003. There is no standard definition, but there are at least two primary/secondary definition sets in circulation.

Mcormick, R. 2004 Legal risk is the risk of loss to an institution which is primarily caused by:
(a) a defective transaction; or
(b) a claim (including a defense to a claim or a counterclaim) being made or some other event occurring which results in a liability for the institution or other loss (for example, as a result of the termination of a contract) or;
(c) failing to take appropriate measures to protect assets (for example, intellectual property) owned by the institution; or
(d) change in law.^[1]

Johnson and Swanson. 2007

The expenses of litigation of a company.^[2]

Whalley, M. 2012

The risk of financial or reputational loss arising from: regulatory or legal action; disputes for or against the company; failure to correctly document, enforce or adhere to contractual arrangements; inadequate management of non-contractual rights; or failure to meet non-contractual obligations.

Tsui TC. 2013

The cost and loss of income caused by legal uncertainty, multiplied by possibility of the individual event or legal environment as a whole.^[3]

One of the most obvious legal risks of doing business not mentioned in the above definitions is the risk of arrest and prosecution.

All definitions contain more detail.

References

1. Roger McCormick. "Legal Risk in the Financial Markets", Oxford University Press
2. IMA. "Issues". imanet.org.
3. "Experience from the Anti-Monopoly Law Decision in China (Cost and Benefit of Rule of Law)". ssrn.com.