Reflections on OpRisk Management
First published:
ISBN: 9781782723493
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The Missing Piece
The Missing Piece
Introduction
Operational Risk in Four Letters
An Invisible Framework
Small is Beautiful in OpRisk Management
The Business Value of ORM
How to Minimise ‘People Risk’
The Missing Piece
Risk Appetite and Framework
From Russian Roulette to Overcautious Decision-making
The Importance of Preventive KRIs
How to Build Preventive Key Risk Indicators
Unlocking KRIs
Six Steps for Preventive KRIs
Have Your Cake and Eat It
Conduct, Not ‘Conduct Risk’
How to Manage Incentives
Is Reputation Risk Overstated?
What Regulators Want
Conduct & Culture
OpRisk Takes Forward Steps at OpRisk Europe 2014
Modern Scenario Analysis
The Rogue’s Path
Rogue Trading No Training: The Connections
What Brexit Teaches OpRisk
OpRisk Survey Shows the Insidious Effects of Political Risk
Discarding the AMA Could Become a Source of OpRisk
UCL Research Shows that SMA Reforms Introduces Capital Instability and Discourages Risk Management
Memo to Bank CEOs: Treat OpRisk with More Respect
Don’t Let the SMA Kill OpRisk Modelling
Almost a decade after its proliferation in the financial sector, risk appetite continues to raise questions. In operational risk, firms continue to struggle with the concept, as well as expressing it and translating it into action.
Having worked with firms for years on the topic, I observe that the wording is particularly ill-chosen. Why would you have an “appetite” for risk? Furthermore, an appetite for risk doesn’t make sense on its own without its necessary corollary: the expected return or expected benefits. Expected return is the missing piece that makes risk appetite exercises cumbersome and illogical. This is why many have difficulty when attempting to express an appetite for operational risk.
The origin of this is the false idea that operational risk, unlike credit or market risk, is only a downside risk – in other words, you make no money for taking operational risk.
On the face of it, this seems correct. Credit loan margins are visible remuneration for risk-taking in credit; insurance margins are the visible manifestation of underwriting activity; and trading revenue is the happy counterpart of market risk. What is the upside of operational risk? We can’t see it
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