Moving forward on the loss data challenge

An overview of Wachovia's approach to addressing operational loss data collection, analysis and reporting. By Dee Harris and Tom Longstroth

Wachovia is the fourth largest bank in the US, with $542 billion in assets, 97,000 employees and banking operations from Connecticut to Florida and west to California. Wachovia's retail brokerage firm, Wachovia Securities, serves clients through offices in 49 states and five Latin American countries, and its Corporate and Investment Bank serves clients in selected industries nationwide. Global services are offered through 40 offices around the world. Creating a comprehensive loss data framework was an important, yet complicated, component of Wachovia's operational risk management (ORM) objective: to create and sustain a competitive advantage through lower earnings volatility, greater customer satisfaction and enhanced reputation.

In 2002, Wachovia's corporate ORM group focused on three key objectives in formulating its loss data collection approach: (1) leveraging existing processes, (2) ensuring data integrity and (3) improving analysis, reporting and decision-making. The aim was to create a simple yet comprehensive loss data approach without significantly affecting business team resources. ORM did not want to burden business units with additional processes for capturing and reporting operational loss events. At the same time, it was necessary for loss data to integrate with other ORM tools in Wachovia's enterprise operational risk management framework, such as risk assessments, issue/action plans and risk profiles.

Much of Wachovia's operational loss data existed in organisational silos. For example, human resources captured losses on workers' compensation claims. Legal captured litigation losses, and loss management captured losses regarding fraud. The corporate insurance group used a tracking system for all claims and losses involving property damage and general liability. Each organisation had processes and case management systems to capture and house loss event data elements, which enabled detailed analysis and reporting. Rather than disrupt these existing processes by attempting to merge multiple discrete data flows and systems into one data collection process, Wachovia decided to use the existing systems to feed operational loss data to the Operational Risk Management Suite (ORMS), Wachovia's integrated operational risk system. ORMS was developed by Centerprise and houses modules for operational loss data and other ORM components.

The integration process for each case management system presented distinct interfacing challenges. For example, the source systems had different data definitions and assumptions. Also, certain system interfaces required engagement from the external vendors responsible for managing those systems. To overcome these challenges, the corporate ORM group developed data standards and file specifications for each data silo and built automated interfaces that pulled data into a central database created in ORMS. By leveraging existing processes, ORM was able to quickly gain access to the necessary data without imposing significant requirements or resource demands on business units.

Case management systems did not capture all operational loss events occurring across the enterprise. The majority of losses not captured in a case management system were the result of business processes, and were recorded directly to the general ledger (GL). To capture these losses, an automated interface was built between ORMS and the GL designed to extract transaction details from designated loss accounts. This information is now imported automatically into ORMS on a monthly basis.

Using a feature of ORMS called the 'GL Mapping Assistant', a designated line of business risk managers can review GL transactions for the month, group them by Basel category and input non-financial event information such as description, event date, discovery date, reputation impact and customer impact. In addition, ORMS has the capability to manually add loss events if a financial loss was not captured in a case management system or on the GL.

Data integrity is an essential component of Wachovia's operational loss data framework (see figure 1). Business leaders, regulators and auditors need confidence that the loss data in ORMS is complete and accurate. In creating the approach, ORM needed to ensure: 1) the data was consistent and complete, 2) data was transferred accurately, and 3) no duplicate loss events existed in the database. To ensure ORM could consistently identify operational losses across the company, existing accounting policies and procedures had to be updated to reflect the new terminology and definition of operational risk as mandated by Basel II and adopted by Wachovia. The ORM team partnered with corporate finance to overhaul the operational loss GL accounts along with the policies for their use. These revised policies addressed what was considered an operational loss and defined which GL account to use. ORM then prepared leadership announcements, reference materials, question and answer sheets, decision trees and case study examples, along with classroom and online training to inform and educate select audiences in the new policies and procedures.

To ensure integrity between the multiple sources of loss data, the ORM group built a validation process to strengthen the accuracy of data in ORMS. This involves validating the data loaded into ORMS with control totals supplied by the source of the data. This is referred to as a 'source file validation' and requires the co-operation of the case management system owners and, in some cases, outside vendors. ORMS also employs filters to screen out duplicate data, since some loss events received from case management system source files may also be included in feeds from the GL. For data imported directly from the GL to ORMS, the corporate ORM team created a monthly reconciliation of ORMS financial data to selected accounts on the GL. In addition, an automated workflow in ORMS requires that all loss events over a certain dollar threshold are reviewed and approved by a line-of-business operational risk manager. This review confirms that all significant losses are captured in ORMS, supports proper event categorisation (eg, Basel category, risk type), and ensures that significant loss events are given appropriate attention from management.

While 100% reconciliation of ORMS data to the GL is not yet possible, efforts are under way to move in that direction. Until it is, targeted reconciliations, data validation and systemic controls over manual entries provide an assurance that the data is complete and accurate.

The transfer, validation and aggregation of data enables more accurate comparisons, analysis and reporting. With ORMS, a comprehensive and comparable loss profile can be built for each line of business and sub-unit. Before ORMS, a manager had to go to separate departments to obtain data for each loss type. Each of these departments had different definitions, thresholds and assumptions, making comprehensive analysis and reporting difficult. ORMS has fostered a common language and understanding across the company, resulting in greater effectiveness and consistency in business unit and executive reporting.

Contemplating a new loss data approach, Wachovia's ORM group knew that comprehensive loss data collection and analysis would be challenging. Multiple complex processes and systems compounded the difficulties. ORMS has enabled a flexible and sustainable framework for managing operational risk loss data by leveraging existing processes and resources. The data validation and review processes provide confidence in the data, and ORM continues to work across the company to enhance data collection processes, strengthen data integrity and improve analysis and reporting. This work is performed with the primary objective in mind – to use loss data and other ORM tools to strengthen business processes and better manage risk, delivering greater value to customers and shareholders. OR&C

The authors extend special thanks to Richard Campbell and David Stone for their contributions to this article

Dee Harris is vice-president and operational risk consultant for Wachovia Securities. Email: [e-mail]

Tom Longstroth is vice-president and operational risk consultant for Wachovia's Parent/Institutional area. Email: [e-mail]

Operational Risk Management