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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.
- Johnson and Swanson. 2007
The expenses of litigation of a company.
- 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.
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.
- Roger McCormick. "Legal Risk in the Financial Markets", Oxford University Press