Journal of Operational Risk

Marcelo Cruz

Welcome to the first issue of the sixth volume of The Journal of Operational Risk. I would like to thank our wonderful staff for the all the hard work put into getting the journal off the ground. Preparing an issue takes months of work, from receiving papers, to choosing the right reviewers, sending and receiving papers to and from reviewers, editor review, copyright review, print and layout work, etc. Multiplying this chain for the many papers that we receive shows just how much work goes into creating each issue. I would also like to thank the operational risk community for their support, both in submitting papers and in subscribing to our publication. In this issue, we once again give a greater opportunity to less technical papers by allowing practitioners to voice their views on current issues

Since, for many, attention is still focused on the financial crisis and its consequences, we publish two papers relating directly to this. It is important that we continue to learn lessons from the experiences that we have had in the last few years. As we are reaching a certain level of maturity after our five years in existence, we are now reflecting on how the journal can be improved in terms of the scope and breadth of research.We are considering a number of exciting alternatives and always appreciate feedback from readers. Again, I would like to emphasize that the journal is not solely for academic authors.We at The Journal of Operational Risk would be happy to see more submissions containing practical, current views of relevant matters as well as papers focusing on the technical aspect of operational risk.

RESEARCH PAPER

We bring you one research paper in this issue. Marco Bardoscia and Roberto Bellotti’s paper, “A dynamical approach to operational risk measurement”, proposes a processbased view of operational risk.We have published a paper using this approach in the past. What is new in this latest model is that they apply their techniques to the severity distributions instead of frequency. The authors claim that the approach is compliant with advanced measurement approaches, since the data is derived from internal losses and expert opinions. With an understanding of the processes involved, this has the advantage that correlation and diversification are used in a new way.

FORUM PAPERS

We also present three very controversial forum papers that I hope will make readers think about the environment that risk management currently inhabits. In the first paper, “The impact of the financial crisis on operational risk in the financial services industry: empirical evidence”, Hess uses the SAS database of industryrelated operational losses to test the hypothesis of a higher operational risk impact on banks due to the financial crisis. It is interesting to note that the author finds that only one business line, trading and sales, has experienced a significant impact due to the crisis, although retail brokerage has also experienced some impact. This is an area that certainly demands more investigation.

In the second paper, “Accounting and risk management: the need for integration”, Brendon Young, Chairman of the Operational Risk Research Forum, provokes the industry from the very beginning by stating that “the failure of risk management is symptomatic of wider intellectual failure”. He gives us much to think about, seeing problems with the auditing industry, the opaqueness of financial reports and enterprise-wide risk management. He deems the current vision of risk appetite to be “poor” and goes on to claim that that “risk management may be regarded as providing a more forensic view in support of management accounting”. It is worth noting that the journal does not necessarily agree with all of these statements, but we have a democratic desire to allow all views that are reasonably articulated to be published for discussion.We would be very happy to publish a response.

In the third paper, “The most insidious operational risk: lack of effective information sharing”, Steven Francis depicts the silo culture that exists in many organizations, showing that a lack of information sharing can actually be very dangerous for a financial firm. The paper provides an interesting outlook on how to articulate this integration in a pragmatic manner.

I hope you enjoy these excellent papers and find them useful.