Operational Risk – A Primer
Keywords: operational risk, basle 2, fraud, sarbanes-oxley, regulatory
The Basle 2 Accord, first drafted in 1999, has just undergone its’ final revision. The Act will have widespread ramifications on all institutions. One of the most notable changes from the original Basle Accord of 1988 is the introduction of a Capital Charge for Operational Risk. In respect of a charge being levied for losses (in excess of balance sheet reserves for doubtful debts) the Financial Services market is unique. One does not see Capital Charges being applied to poor controls in manufacturing where margins are small and where errors of 1 in 1,000,000 can often be deemed excessive!
The need to include a Capital Charge specifically for Operational Risk has raised the ire of many in the industry who state that processes are in place to minimize these effects, specifically as it relates to Operational Resilience and Systemic failures.
Indeed many in the Industry are of the opinion that Ops Risk should be relegated to a Pillar 2 charge, determined by each country’s own regulators and that a combination of balance sheet reserves and other instruments such as
1) Insurance policies
2) Commission charges
3) Surplus APRs on Credit Cards
As a result of the internal industry conflicts and the nascent nature of Ops Risk as a risk category many institutions are taking a wait and see approach. However a more immediate regulatory issue has pushed it to the fore, Sarbanes-Oxley.
One of the emerging trends is that, in Financial Institutions, Sarbanes-Oxley is seen as a subset of Operational Risk and that many firms has merged the two together.
Financial Institutions have spent relatively little on external Operational Risk solutions, when compared to the spend on Market and Credit Risk, due to the relevant simplicity of market offerings. Many vendor offerings are centered on controlled self assessments (CSA) and loss data capture tools, all of which can be developed internally. Whilst Self-Assessment is the right first step to take, it is just that, a first step.
As the market matures there is strong evidence that the current offerings for Ops Risk will be superceded by the need for automation, integration, visualization etc and an increase in focus away from CSA and the recording of losses to loss prevention.
Survey results indicate that there is a substantial gap between expectations and reality when it comes to the short-term benefits of putting a risk management framework in place. Many industry participants expect a reduction in losses and loss events of over 20% for minimal investment!
The Bank of International Settlements (BIS) has used the Basel Accord to force Financial Institutions to adopt the process quality control lessons that the manufacturing sector have learnt over the past 30 years.
It is the authors’ contention that the BIS intention in introducing an Operational Risk Capital Charge is to focus senior management attention on the issue of Operational Inefficiency and jump start an improvement process.
The Spirit behind Basle 2 is to
1) Place focus of management on maximizing operational effectiveness and resilience whilst minimizing risk
2) Highlight that the real purpose of operational risk management programs, including loss data collection and capital modeling, is just to understand and better manage business better
In essence “Sound operational risk management is just good business management practice”.
Julian Fisher is a Managing Director at Crest Rider, a Management Consulting firm dedicated to helping clients navigate the complex arena of Risk Management. For more information on Crest Rider’s range of services go to www.crestrider.com
Previous Articles Highlighter:
Edinburgh Capital Of Scotland (1)
In 1975 the Edinburgh Playhouse Society was formed. A second petition brought a further number of signatures, helping tremendously in saving the building. Over the next twelve years the theatre changed hands five times.
You Can Learn To Become An Efficient Public Speaker (2)
So, you take a deep breath and begin to muddle your way to the speech. At the end there is a sigh of relieve as you try to figure out if you had even holding your breath the whole time.
Avoiding Home Business Scams (3)
Keywords: avoiding scams, home business opportunity, make money from home, make money online, How many times have you heard about a great home business opportunity? Probably more than you care to remember.
Olu Deniz Meaning Dead Sea (4)
The winter months are cold. The resort Olu Denizs offers traditional Turkish baths no trip to Turkey is without one. Wrap yourself in an sarong relax on a heated marble slab and enjoy the invigorating body loofah scrub and get covered head to toe in warm bubbles.
The Capital Of The North East Of England (5)
It is a city of both tradition and innovation. It has a population of Geordies and many other immigrant groups. It can be seen as cosmopolitan and famous for its hospitality.
A Fishing Village Of Estartit (6)
In addition to this Estartit, and in particular the protected Medas Isles are considered one of the best spots on the Mediterranean fore scuba-diving, and numerous diving schools including BSAC and PADI approved centres exist.
A Cramlington New Town (7)
However it was redeveloped in the sixties and named Cramlington New Town. The population reaches twenty nine thousand. Historically in the twenty century, the area centre around the development of mining.
Leadership Styles - Practice Effective Leadership (8)
While this is true, there is the everyday leadership and a slightly different outlook to leadership as well. Here are a few of them. 1. There Are Different Kinds of Leaders Among leaders are formal and informal leaders.
Multiple Domain Name Penalty (9)
- Don't create multiple pages, subdomains, or domains with substantially duplicate content What This Means to You There is a clear and present danger in having multiple sites pointing to the same location if they load exactly the SAME content - this is a SERIOUS breach of Google's Webmaster Guidelines and is expressly FORBIDDEN because the search engines can only interpret this as a blatant attempt to generate duplicate content under different URL's. Regardless of your actual intentions in this, its likely to result in a BAN from search engine indexes.
How To Market Your Blog For Optimal SEO Gains (10)
Perhaps you should encourage people to copy and distribute your blog content, providing the Author Panel remains intact? That would be the best way to ensure widest distribution, and the consequent proliferation of valuable 1-way links back to your site!
Newer Articles Highlighter:
The Gift Of Foster Parenting (1)
A child in this condition needs full time support with a family that will love them and make them feel needed. It's amazing to see a family dedicated to foster parenting.
Hear My Call! Speaking So Your Customers Will Hear (2)
This is why it is necessary for you to study your customer base and know who you are talking to. Once you establish an acceptable voice and vocabulary, you'll hit the mark with your customers every single article.
Get The Cold Hard Facts About Treadmills (3)
The more expensive treadmill models will also offer a selection of preprogrammed exercise routines. Less expensive treadmill models require you to manually change the incline, which can be very frustrating if you want to make adjustments midway through a workout session.
The Different Aspects Of Things To Do With Ferrets (4)
Unfortunately this can run up all kinds of veterinary bills for older ferrets. The only thing missing from these negative things to do with ferrets list is that they love to be nosy and get into incredibly tiny holes and areas of the home.
Dry Skin Is Thirsty And Other Useful Tips (5)
The two most common, sluggish, digestion culprits that affect your skin are not enough water and not enough fiber. Put two tablespoons of coconut oil in your smoothies. Eat at least one organic apple with the skin on every day.
Go With The Flow Of The Ever-Changing Market (6)
Always keep an open mind when it comes to your article marketing plan. The free market can be erratic and full of surprises. This is what makes owning a business so exciting!
Success Sucks! (7)
"What happened to Article Marketer?" "What's going on with those guys? They've always been so reliable!" "Are they done?" "Are they nuts?" We were working like crazy to fix what was broken, and improve everything else while we were in there.
Get Ready, Get Set, Get Writing! (8)
As you gain a rhythm, you'll find yourself creating articles in a fraction of the time. You will also find motivation in results. And with the increase in traffic from your first few articles, your incentive for creative compelling articles will continue to grow.
Affiliate Marketing - 3 Necessary Tools For The High Rolling Affiliate Marketer (9)
Is there a shortcut to Affiliate Marketing glory? All these questions play around in the minds of affiliate marketers who want to make it big in this business. Although affiliate marketing is touted as one of the easiest and most effective ways to earn money online, it is not as easy as it sounds.
What Is Bond Market? (10)
Quite different from the stock, futures and options markets, most of the trading volume in bond markets takes place between brokers and large financial institutions in an over-the-counter market. But, a couple of bonds, primarily corporate ones, are listed on exchanges.