|
Credit risk and market risks are the ones, that more or less have defined parameters and a structured approach can be followed to mitigate them. Operational risks, on the other hand, may sometimes arise from an area which is considered to be a risk free zone in an organization. It might result from inadequate or failed internal processes, or from any external events. A right kind of management framework and a significant commitment to technology issues are required to prevent the loss arising from operational risks. The technology has to be inline with the strategy followed by the organization and its culture.
The Bank for International Settlements (BIS) has already announced its intention to charge capital for operational risks with effect from the year 2005. Accordingly banks will be forced to appropriate some percentage of capital to cover the unindentified but perceived operational risks. This additional commitment though necessary, will certainly add to the pressures of a bank in terms of committing additional funds to capital, collating the necessary data, building the right framework, understanding the technology issues and the like. Banks which pay more attention to their operational risk environment and proactively attempt to introduce the more advanced management framework and measurement techniques can quantify capital adequacy in a more precise manner.
This article discusses the issues concerning risk management framework and related technology issues, supported with a model adopted by Dresdner Kleinworth Wasserstein in collaboration with Raft International1.
All along, the focus had been mainly on credit risk and market risk. Both the risks have more or less defined parameters and a structured approach to risk mitigation and risk control. On the otherhand, operational risks emerge from sources, sometimes, from that area of an organization that is perceived to be a risk free zone. In the year 1991, when the Bank of Credit and Commerce International failed, losing $1.5 bn, the sheer magnitude of a gigantic collapse and the absence of any tight international regulatory controls were felt. Though it ultimately boiled down to a case of "old fashioned fraud" the involvement of the entire management team served as a wake-up call to the regulatory community world over. However, there was a slumber till Nick Leeson struck in February 1995, landing Barings Bank with a loss of $1.2 bn. That proved to be the "defining moment" for operational risk management. It was capped by September 11, 2001, WTC attacks, throwing open operational risks in all its probable and ugly dimensions.
|
