Operational Risk 421 white papers and resources. © Boston Consulting Group 2020. Three institutions—one from Europe and two from North America—stood out for their ability to create and execute a more proactive, integrated, and sustainable approach to operational risk. Leading OR institutions try to find the right balance by mixing formal rewards based on risk outcomes with a strong set of informal incentives. They also establish flexible budgeting processes that allow them to redirect investment over the course of the year as risks that require stronger management emerge. Operational risk focuses on how things are accomplished within an organization and not necessarily what is produced or inherent within an industry. Sign up today and get access to: © Infopro Digital Risk (IP) Limited (2020). Taught by a world leading expert in the field and highly regarded guest speakers, the course is a must-have for all the operational risk practitioners wishing to benchmark their practice and discuss best practices. 13. 2018-05-25: Best Practices on Designing and Implementing an Effective Operational Risk Framework Promoting and Developing the Discipline of Operational Risk Management Manoj Kulwal , June 5, 2018 November 9, 2018 , Webinars , 0 Underperforming OR programs tend to budget backward, not forward. In short, operational risk is the risk of doing business. For instance, one bank in our study continued, through inertia, to build out its business continuity program, increasing staff by more than 40% over a five-year period, even though the bank’s operational risk capital needs for business continuity had not grown and there had been no major business continuity incidents. The Basel Committee is made up of representatives from bank supervisory authorities worldwide, some 40 institutions from 28 jurisdictions, see BCBS (2015). For assistance please visit our Help Centre. Besides, the book provides practical tips to set up an effective operational risk and control framework. It is also a fantastic opportunity for newcomers to gain a comprehensive overview what modern operational risk managers need to know. Detecting operational outages from Large Value Transfer System transaction data, Bank leverage and capital bias adjustment through the macroeconomic cycle, https://www.infopro-insight.com/terms-conditions/insight-subscriptions/, Collateral Markets and Financial Plumbing (3rd Edition), Operational Resilience in Financial Institutions, The RMB Handbook: Trading, Investing and Hedging, California Privacy Rights – Do not sell my information. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact. This should lead to a concrete statement or set of metrics defining success (phrased in business terms) that board and senior management support. You should glance at Yahoo’s front page and note how they write news headlines to grab people to open the links. If you would like to place an order please email [email protected], Best Practices in Operational Risk Management, An Operational Risk Paradigm Shift: Tracking the Velocity of Change, Blockchain Technology: Emerging Opportunities and Risks, Big Data and Fintech Trends and Risks: A Critical Approach, Privacy Issues, Business Process Outsourcing and Cross-border Data Sharing, Managing Operational Risk in Data Frameworks, Identification, Quantification and Monitoring of Operational Risk. Brazil’s BM&F in 1999: a central counterparty near-failure case? This evolution presents new types of operational risk (OR), and many banks are suffering large losses or embarrassing headlines from cyberbreaches, new varieties of fraud, third-party issues, and unreliable technology. Is there anybody out there? The Committee is seeing sound operational risk governance practices adopted in an increasing number of banks. Risk analysis at the Bureau of Reclamation has evolved over the years and will continue to evolve. The SMA proposal would require larger institutions to continue collecting loss event data, and explicitly encourages all banks to comply with the Principles for the Sound Management of Operational Risk (BCBS, 2014). Risk management practices in the financial services sector focus on identifying, measuring and analyzing those threats … Nonetheless, the Committee’s action opened a new chapter in the development of this still-formative discipline. Just my opinion, it … Management and Supervision of Operational Risk Introduction 1. SA-CCR tweak could slash equity risk charge – research, Direct clearing could solve CCP concentration risk, SA-CCR proves a bitter pill for US banks to swallow, SOFR credit debate is “hindrance” to corporate transition, Cross-currency swaps will use RFRs on both legs, says JP exec, Fallback dodgers walking a difficult path, Fed and FCA see path to synthetic dollar Libor, How hedge funds lost big on US dollar Libor delay, How buy-to-hold accounting shuffle boosts US bank capital, Parallel lines: EU begins fight over Basel output floor, Fine margins – Integrating risk and IM costs under new CCP risk models, FSB offers loud warning and muted response on climate risk, Data quality in focus as UMR deadlines stretch, Diginex chief on taming the Wild East of cryptocurrencies, Machine learning will create new sales-bots – UBS’s Nuti, Why central banks aren’t worried about FX algos – for now, Time for the next-generation investment book of record – Eidos, Output floor to drive Basel III capital increase at EU banks, Covid disrupted sale of bail-in bonds by EU banks, Basel FRTB capital impact study confused by outliers, EU banks and state-backed loans: bad news with a long fuse, Degree of influence: volatility shakes markets and quant finance, A guiding light for corporates lost in the fog of XVAs, A step closer to the perfect volatility model, Podcast: Matthias Arnsdorf on a new – and cheaper – KVA, Operational Risk Capital Models (2nd edition), Navigating European Energy and Commodity Markets Regulation. One board member complained that he was “tired of the cyberrisk executive sending alarmist articles without proposing any solutions or concrete goals.” Such tactics can gain attention and funding, but they usually backfire in the longer term. Most have some type of “control tower”—a small group, usually housed within the second line of defense, that monitors the existing set of risks and spots new ones that might become serious. BCG’s benchmark also revealed a number of banks that have excelled in dealing with OR. Blurred roles and responsibilities between lines of defense hinder many OR programs, leading to redundancy in some cases and to gaps in others. 2. The survey was completed by the firms’ Operational Risk teams and their colleagues. One bank executive noted, “We can invest an additional $10 to 20 million, but not really know if what we’re doing is more effective,” and then added, “We seem to default to rote, tick-the-box exercises that satisfy our regulators but aren’t risk based or aligned with business value. Energy Risk Commodity Rankings the biggest survey in the global commodity derivatives market to rank dealers, brokers and research providers. The specific tools used to identify and assess/analyse … BCG was the pioneer in business strategy when it was founded in 1963. View our latest in market leading training courses, both public and in-house. But because the second line team was understaffed and distracted by several remediations, it missed two important trending risks that ultimately cost the bank over $200 million. This white paper discusses the potential impact of UMR on portfolios, profitability, strategy and resource. Leading banks also avoid scaremongering. Besides becoming more effective at managing operational risk, they are achieving high performance without sharply elevating their OR spending. In addition, they plan for scalability, assigning triggers for when they will make critical investments as the importance of a particular emerging risk increases. That insight shaped the bank’s OR goals. As part of your Risk.net subscription you are entitled to 20% off all of your Risk Books purchases. Her book Operational risk management – best practices in the financial services industry has been praised for furthering this message with clarity and good sense, and has been adjudged Risk.net ’s Operational risk book of the year. The second step is to address critical obstacles to achieving the bank’s OR goals. For example, a bank focused on customer service might say, “To support an outstanding customer experience, our operational risk program’s goal is to prevent material customer-facing disruption or error.” Agreeing on those goals requires careful prioritization and, in some instances, difficult tradeoffs. Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. Our benchmark confirmed how difficult it can be for banks to withdraw resources from an established risk management area. Diane Maurice and Jitendra Rathod. March 12, 2016, was a challenging day for operational risk management. It’s a chain reaction that can be fatal to a company’s reputation and possibly even to its existence. The results show that some banks have begun to crack the code. Are companies in general doing enough to identify the sources of operational risk? Operational Risk Management (ORM) or OR Management is defined as a continuous process which involves implementation of best practices such as; assessment of risk, risk decision making and implementation of risk controls. BEST PRACTICES FOR OPERATIONAL RISK MANAGEMENT RC: In your opinion, how important is the operational risk management function within an organisation? The Basel Committee on Banking Supervision (BCBS) issued its proposal to replace the advanced measurement approaches (AMA) for operational risk capital estimation – originally adopted in the Basel II Accord of 2006 – with “a single, non-model based method” called the standardised measurement approach (SMA).11 BCBS (2016). To understand how banks are dealing with the increased strategic importance of operational risk, BCG benchmarked the performance of ten major banks globally. The bank also created a rotation program that enables high-potential second line staffers to spend time in audit and first line operational risk roles to deepen their skill base and, ultimately, improve the quality of the second line. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/. Emerging Operational Risks: A Short Guide to Adjusting Your Risk Framework. Such groups help operationalize the risk-sensing function. Companies are registered in England and Wales with company registration numbers 09232733 & 04699701. CLS: can’t live with ’em, can’t live without ’em? o Dimension operational risk exposure (quantitative, qualitative) to confirm an acceptable level of risk o By ensuring adequate controls, maintain exposure (and financial/reputation risk) within acceptable levels o Determine the appropriate level of capital to absorb extreme losses associated with risks that do not lend themselves to control, and for control failures All rights reserved. Over the course of several months, we conducted extensive interviews with executives and operational risk teams within the traditional second line of defense or oversight role, and within the operating businesses themselves. The seven Basel operational risk categories and the Basel business line categories are described and their use in the framework is discussed. In addition, to help support the operational risk needs of the business, some banks have created a dedicated risk unit within the first line—often called a “line 1.5”— to manage aspects of its operational risk, such as issues detected by the second line, by audit, or by the first line staff. Yet boards and executive teams have begun to question the effectiveness of these investments. In mature areas of operational risk (that is, in areas with flat or declining risk and losses), the leading OR institutions in our benchmark act more aggressively. The bank also sought to improve the reliability of its core consumer platforms to prevent further failures. 30 out of 40 ORIC International members from across the globe participated in the survey. To help one bank achieve its goal of differentiating the quality of the customer experience, the bank’s OR leaders focused on controlling risks from frequent changes in products, processes, systems, and organizations, which they had identified as being the leading causes of service disruption for customers. Register for a Risk.net Premium subscription to access this content. Top-performing OR programs are more flexible and strategic than other such programs. In discussions with companies, we have often noticed that the term “ Common industry practice for sound operational risk governance often relies on three lines of defence – (i) business line management, (ii) an independent corporate operational risk management function and (iii) an independent review. This information resource looks at key industry issues and practices, which can be used to aid in the decision-making process and help maintain a competitive advantage. Further, whereas many banks leave proven but people-intensive OR processes alone, leading OR institutions use technology to provide a more efficient, repeatable solution. A recent addition to the risk management bookshelf offers both. Boston Consulting Group is an Equal Opportunity Employer. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/, If you would like to purchase additional rights please email [email protected], You may share this content using our article tools. In her blog, best practice, Margaret Rouse, writer for TechTarget, defines a best practice as a “technique or methodology that, through experience and research, has proven to reliably lead to a desired result. 13. If you have one already please sign in. Best Practices for Operational Risk Management | Project Eve is kinda plain. They articulate clear roles and responsibilities for each line of defense. In response, many banks have increased their spending on OR management by more than 50% in the past five years. That construct helps executives think about “how much coverage they want to buy and what it would cost.”. If you don’t have a Risk.net account, please register for a trial. Operational risk management should ensure consistent implementation and sustained performance of an institution’s operational risk framework. Leading OR institutions spend time clarifying the roles for each line of defense and ensuring that each line has the skills needed to perform its duties. As many recent adverse industry events and natural disasters have shown, having a strong safety culture is just the starting point to mitigating an organization's risk. The bank channeled spending toward mitigating risks caused by product and technology changes, and that focus gave the bank a clear way to prioritize spending and well-defined targets by which to gauge the success of the OR program. Finally, we examine conditions under which the cost-effective strategy of outsourcing operational asset management functions can be successful for managers and clients. Operational Risk Management: Best Practices in the Financial Services Industry by Ariane Chappelle (Wiley Finance Series, 2019) explores the range of operational risks while offering step-by-step guidance on getting your own program underway. Sessions include resiliency in third-party risk management, financial health of third parties, and unknown concentration risk. At one leading OR institution we studied, the OR team compares the process of managing risk to the more familiar process of buying insurance. They typically revisit their strategy and budget only in the wake of large losses or when prompted by regulators, and they use additional investment to expand existing risk management processes past the point of diminishing returns, with “tick-box” exercises that grow more complex and cumbersome from year to year. One institution actively reallocates staff based on its operational risk capital requirements. Institutions that aspire to build a leading program must take a few crucial steps. While they had different strategies and risk profiles, our analysis found that these leading OR institutions do five things especially well. For example, one leading OR institution needed to make rapid changes to products and systems to gain competitive advantage and found that risks related to these changes were the primary driver of operational losses. Take a look at the wide variety of events and training on offer. Operational Risk Modelling is Dead, Long Live Operational Risk Modelling! That multifaceted approach allows the bank to keep pace with the evolving risk environment. They manage mature risks cost effectively to free up and reallocate staffing and investment. Empowering Operational Risk Best Practices in the Power Generation and Utilities Industry By Scott Lehmann December 12, 2019 Supervisors and crew in the Power Generation and Utility industries face a balancing act when they go out to the field to perform maintenance, repairs or inspections. holistic approach to risk management. The “Whys” and “Hows” of Operational Risk Model Benchmarking, Integrated Programmes for Operational Risk, Emerging Operational Risks: A Short Guide to Adjusting Your Risk Framework. A free webinar on Nov. 9 focused on the operational risk management profile of best-in-class organizations and shared insight from pioneers in safety and risk management. All rights reserved. Energy Risk Asia Awards 2021 submissions are now open! This process helped one bank identify gaps in its approach to cyberrisk and revealed the need for improved training to help programming teams execute their cyberrisk responsibilities. Operations, Risk.net's Global Libor Series delivers the inside track on regulatory, market and product developments, explores the implications and emerging risks for market participants, and reveals the strategiâ¦, Understand how to practically implement machine learning models in your organisation, The theme of this yearâs Convention is âRise to the Moment,â which reflects the expectations and challenges that risk managers around the world are facing. Instead of basing their staffing estimates on current levels (with some additional increase for remediation and hot spots), leaders regularly calibrate where their current and emerging operational risks are greatest and reallocate staff accordingly. They created a cyberrisk forum with peer banks to stay current on potential threats and mitigation efforts, and they use data from the Operational Risk Exchange (ORX) to monitor loss trends. Operational Risk Stress Testing: Emerging Best Practices Share Following the crisis, financial institutions have been devoting significant time and resources to stress testing balance sheets and P&L under different macroeconomic conditions. The Authoritative Guide to the Best Practices in Operational Risk Management 'Ariane Chapelle is one of the world's leading teachers, thinkers and writers about operational risk. By focusing these temporary resources on a specific goal, the bank created goodwill with the regulators, tapped technical experts to build an effective program, and freed in-house OR teams to focus on other improvements. The Five Practices That Set Operational Risk Leaders Apart. On the Basel II Accord, see BCBS (2006). Many regulators now require that risk management be part of senior leaders’ bonus calculations. You might add a video or a related pic or two to get people interested about what you’ve written. The banks that most effectively channel their OR efforts in these five areas will be in the strongest position to anticipate and protect against risks that threaten growth and profitability in both the short run and the long run. Bank operating models continue to evolve in response to new regulations, digitization, a volatile economic and risk environment, external threats, and advances by nontraditional competitors. Managing Director & Senior Partner, Leader Financial Institutions Data Solutions Suite. Integrated Programmes for Operational Risk. In stark contrast, many less effective banks manage certain critical risks exclusively within the first line. Phrasing risk topics in more-familiar business terms is often a more effective strategy. Published by Infopro Digital Services Limited, 133 Houndsditch, London, EC3A 7BX. If you are a Risk.net subscriber you are entitled to 20% off your Risk books purchases. OR teams sometimes wade too deeply into technicalities, don’t understand how to “speak business,” or don’t discuss how risk issues relate to the bank’s overall goals. Despite increased investment, many banks feel unsure about whether their OR programs are performing effectively in what has become a more complicated and volatile environment. In one case, a leading OR institution demoted a rising star in a large business whose team had presided over an unusually large operational loss—an action that sent a clear message to other managers regarding the importance of risk management. Effective control towers do more than track risks, however. Operational Risk Management offers a comprehensive guide that contains a review of the most up-to-date and effective operational risk management practices in the financial services industry. To use this feature you will need an individual account. Alternatively you can request an individual account here: Best Digital B2B Publishing Company 2016, 2017 & 2018, Uncleared margin rules – the tricks, traps and tools. Copyright Infopro Digital Limited. Adjusting or reducing risk resources takes boldness. To ensure effective oversight of all operational risk topics, leading institutions create small teams within the second line to oversee topics such as cyberrisk where the first line organization formerly had sole responsibility. Ariane Chapelle's Operational Risk Management: Best Practices in the Financial Services Industry has been named Book of the Year by the OpRisk Awards 2020. Now the bank has an annual process to evaluate the roles and responsibilities of every line of defense, ensuring that each has the skills needed to succeed. Role charters detail these assignments so that all stakeholders understand their exact responsibilities. One institution, for example, rewarded business leaders based on how many OR issues they resolved, only to find that those leaders self-identified many low-risk issues expressly to close them out. Small control failures and minimized issues—if left unchecked—can lead to greater risk materialization and firm-wide failures. Watch the archived presentation. What’s so special about time series momentum? All rights reserved. Besides managing mature risks more effectively, leading OR programs do a better job of surfacing and tracking emerging risks. In addition, to help support the operational risk needs of the business, some banks have created a dedicated risk unit within the first line—often called a “line 1.5”— to manage aspects of its operational risk, such as issues detected by the second line, by audit, or by the first line staff. These leaders proactively create a cycle of reducing headcount in mature areas of OR through lean process redesign and automation to free up resources for newer, less mature areas. If further highlights key decision stages in best-practice UMR planning and compares theâ¦, Risk.net partnered with specialists NICE Actimize to survey senior financial crime executives in banks and other financial services firms to assess the efficiency of current resources, processes and â¦, Search and download thousands of white papers, case studies and reports from our sister site, Risk Library, Edited by Individuals in one bank’s control tower group regularly meet with managers across banking disciplines, from business lines to call centers, looking for insights into what’s changing, where losses are emerging, and where other risks may be tapering off. And some business leaders lack the knowledge base or fail to invest the time needed to keep up with evolving risk topics. Below you will find a collection of operational risk white papers by industry leading experts. The leading OR institutions in our benchmark do things differently. Operational risk (OR) is the risk of loss due to errors, breaches, interruptions or damages—either intentional or accidental—caused by people, internal processes, systems or external events. OpRisk Awards winners are selected by Risk.net and recognise excellence in operational risk management. current practices in operational risk management in the insurance industry, along with the development priorities going forward. Loss data standards are introduced, along with examples of regulatory expectations and best practices for the many elements of an operational risk event data collection process. In the absence of well-defined roles, many second line OR functions may be stretched to cover issues that the first line might manage, to the detriment of their core responsibilities. A commitment to using the best practices in any field is a commitment to using all the knowledge and technology at one's disposal to ensure success. They create a strong predictive risk function to identify emerging risks. Not all such programs have been effective, however—and in some cases, they have even created perverse incentives. Operational Risk Management offers a comprehensive guide that contains a review of the most up-to-date and effective operational risk management practices in the financial services industry. The banks keep these teams small so they cannot take on any operational roles. These structures are most effective when they support specific first line needs (rather than duplicating the functions of the second line), such as cyberoperations or quality control. Best Practices in Operational Risk Management. They set clear objectives and maintain discipline around strategic priorities. Risk Management Practices. All qualified applicants will receive consideration for employment without regard to race, color, age, religion, sex, sexual orientation, gender identity / expression, national origin, protected veteran status, or any other characteristic protected under federal, state or local law, where applicable, and those with criminal histories will be considered in a manner consistent with applicable state and local laws. The Best Practices Training Manual contains what are considered the "Best Practices" currently in use for estimating dam safety risks at the Bureau of Reclamation. Those efforts significantly lower costs while continuing to support a consistent, high-quality control environment. Instead, as our benchmark shows, the most effective OR programs need to become as dynamic, targeted, and responsive as the banks’ own operating business lines, with a well-defined and well-aligned series of objectives, better resource allocation, superior risk detection and mitigation capabilities, clear roles, and revised performance incentives calibrated to sustain the desired behavioral changes. Should the risk level reach a stage at which it merits its own policies, procedures, and dedicated management team, the control tower can recommend the creation of a separate formal risk program. All organizations are confronted with risks that have the potential to negatively affect their business. With digitization, regulation, and globalization disrupting the business and operating landscape, banks can no longer afford to rely on static, check-box controls. FRFIs are encouraged to continue to develop and improve the tools they use to manage their operational risk and to monitor and adopt best practices in this area, as appropriate (including prioritising enterprise wideFootnote 7coverage). Digital, Technology, and Data, October 11, 2016 March 12, 2016, was a challenging day for operational risk management. 14. All changes should be logged and controlled so they can be monitored and audited. The first is to create clarity around OR goals, showing how and where superior OR management will add value in line with the bank’s overall strategic direction. Strangle to resuscitate: evidence from India. In the military and other government entities, a “need-to-know” basis is often used as a rule of thumb regarding access and shari… Operational Risk Management is a comprehensive guide that contains a review of the most up-to-date and effective operational risk management practices in the financial services industry.. Featuring three days of learning, discusâ¦. The Asia Risk Awards return in 2021 to recognise best practice in risk management and derivatives use by banks and financial institutions around the region. OPERATIONAL RISK EVENT DATA That process involves making thoughtful and explicit tradeoffs between risk reduction and operating cost. For example, one bank hired a team of contractors to improve a technology risk program to meet regulatory expectations. They reward leaders who proactively address risks and punish those who hide them (by looking at such things as the percentage of issues that are self-declared and at losses that fall outside the formal list of top and emerging risks.) As a result, that bank is far more successful in maintaining effective cost control over mature risks and is more nimble in scaling up its risk resources in new areas. Please email [email protected] for more information. They revise incentives to lock in the behavioral changes needed. 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