Operational Risk Management

Ann Rodriguez and Viney Chadha

“If anything can go wrong – it will” Murphy’s Law

It would be a mistake to conclude that the only way to succeed in banking is through ever-greater size and diversity. Indeed, better risk management may be the only truly necessary element of success in banking.¹¹ Alan Greenspan, Chairman of the Federal Reserve, American Bankers Association Annual Convention, October 5, 2004.

DEFINITION OF OPERATIONAL RISK MANAGEMENT (ORM)

The definition of operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk (Bank of International Settlements, 2006).

In the previous chapter, we referenced operational risk as one type of risk that an organisation has in its universe of risks. Since operational risk is a common type of risk that all organisations face, we will describe an operational risk management (ORM) framework to manage this type of risk and show how KRIs support all of the components of an operational risk programme to help organisations achieve a more responsive and informative view of its risk profile and control