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Operation Risk Management

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Operational Risk Management

Historically, Operational Risk has been perceived as the need to protect against fraud or other high-impact low-probability events. However, with globalisation and much deregulation within the financial services industry and other service industries, plus tremendous technology advancement, financial institutions and other service provider companies are now exposed to significantly higher levels of everyday Operational Risk.

Increasing customer demands, the need to remain competitive and innovative, the requirement to reduce operating costs, the need to increase revenues, implementation of advanced technology and the challenge to move to various outsourcing arrangements all add to our everyday aspects of Operational Risk that must be controlled, eliminated, or minimised in order to satisfy the relevant regulators and enhance shareholder value.

Operational Risk has always been perceived as the most difficult of all risks to identify, control, measure, monitor and overall effectively and efficiently manage. Hence it has been viewed as the most complex of all risks. However, in today’s fast moving, constantly changing and more than ever challenging world, banks, other financial service institutions and other service provider companies are now forced to recognise and address the requirements and implementation of an effective on-going Operational Risk Management framework. Such has been very clearly demonstrated by the global market turmoil that all banks face in today’s market and the associated recent lessons learnt.

In addition with the introduction of Basel II framework within the Banking Industry, banks must undertake meaningful quantification of the levels of Operational Risk they are exposed to. They must set minimum qualitative standards to be met. It is widely anticipated that in light of the recent market turmoil, certain quantification and minimum qualitative standard levels will be subject to enhanced standards/requirements. The current process includes establishing Self Assessment Programs that recognise best market practice, setting key risk indicators with acceptable threshold limits, and tracking financial loses with incident/event reporting. On-going pro-activeness to minimise all aspects of Operational Risk must be ensured. Furthermore, transparent and effective senior management Operational Risk reporting, needs to be put in place. Doing so provides for a meaningful contribution to the reduction in the level of Economic Capital Reserves required to cover Operational Risk under the selected Basel II framework methodology. Such similar management process for institutions not regulated directly by the Basel II is also an appropriate due diligence procedure to effectively and efficiently manage aspects of Operational Risk within their corporation.