Managing Operational Risk
First published:
ISBN: 9781782722861
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Solutions for a Triumvirate of Seemingly Intractable Problems
Introduction
Three Historical Spikes in Operational Risk Losses
First-Order Effects: Transforming Credit Defaults and Market Turmoil into Operational Risk Losses
Second-Order Effects: Transforming Rising Unemployment and Falling Interest Rates into Operational Risk Losses
Conclusions and Root Causes
Regulatory Change: Part of a Perfect Storm
Macroeconomic Threats: Tax, Rising Interest Rates and New Asset Bubbles
New Technology: Changing Business Models and Risk Profiles
Three Horsemen: Societal, Political and Environmental Change
Backtesting to the Mid-1990s and Conclusions
Defining and Cascading Operational Risk Appetites
Aligning Operational Risk Management Frameworks to Appetites
Estimating Exposures to Tail Events
Solutions for a Triumvirate of Seemingly Intractable Problems
Conclusions
Some key elements of operational risk management were either not covered by Basel II or, in the case of reputational risk, positively excluded. So this chapter covers three critical and often misunderstood aspects of operational risk management, namely:
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- managing the operational risks arising from change;
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- approving reputational risk and responding to reputational damage; and
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- escalating issues effectively.
MANAGING THE OPERATIONAL RISKS ARISING FROM CHANGE
“…no plan of operations extends with any certainty beyond the first contact with the main hostile force.”
Field Marshall Helmuth Moltke, commander of the Prussian Army during the Franco-Prussian War
All change initiatives increase the operational risk profile of a firm in the short term and typically also change it permanently, either for better or for worse. For example, the automation of a manual process will reduce a firm’s exposure to execution, delivery & process-management risks but may increase the firm’s exposures to business disruption and systems failure. Change includes cost-reduction initiatives and disposal and wind-down of businesses; the implementation of new
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