Operational Risk Management – I

Today I had a chance to discuss with a client regarding Operational Risk for banking and financial sectors and would like to share the ideas here. 

Operational risk is defined as “the risk of losses resulting from inadequate or failed internal processes, people, and systems or from external events. The definition includes legal risk, but excludes strategic risk and reputation risk.” [1].

1. Incident Reporting – static analysis. It gives a chronology of past events, their nature, their cause and how the case was handled.
2. Dashboards – dynamic analysis. They describe the evolution of operational events by activity or by department, providing a dynamic representation of the losses.
3. Key Risks Indicators (KRI’s) / Key Performance Indicators (KPI’s) – benchmarking analysis. Allows a comparison of the dashboards to predefined standards and an assessment of the evolution of the risk.
4. Risk and Control Self Assessment (RCSA) – proactive analysis. Provides a prospective view of the potential risk based on the collection of information by experts in the field.

In our discussion, we realized that banking and financial sectors in Thailand still deploys only up to static analysis from the various case studies that could be found and read in public forums like http://pantip.com/cafe/sinthorn. The point addressed was now that the Bank of Thailand has announce that commercial bank has to compile with the BIS policy, where should they start, which solution should be considered and weather the solution deployed completely answers the subject given. I’ll write about this in the coming articles.

[1] Bank of International Settlements, (2003): “The New Basel Capital Accord”, Consultative Document, Basel Committee on Banking Supervision.

[2] Bank of International Settlements, (2002) “Sound Practices for the Management and Supervision of Operational Risk”, Basel Committee on Banking Supervision.