Operational Risk

Major operational risk failures within financial institutions are headline news. Whereas losses stemming from credit or market risk are often accepted as a cost of doing business, stakeholders and the wider community may be less tolerant of operational losses, particularly where they derive from high profile fraud or perceived lack of control. In recent years operational risk management has risen up the agenda of financial institutions, both as a means of protecting against becoming the next Barings, and as a result of increased sophistication in modelling techniques such as those under Basel II.

The core protection against operational risk in any institution is a rigorous system of internal control. This has been recognised for many years, along with the need for review by an independent audit function. More recent innovations have attempted to quantify operational risk, using methods such as control self assessment, key performance indicators and modelling losses and capital.