A Risk Professional's Survival Guide: Applied Best Practices in Risk Management

CHAPTER 14 Operational Risk Management

OVERVIEW

Ten years ago SifiBank made the headlines after a computer glitch in its retail banking processing system shut down access to 90 percent of its ATM machines and 65 percent of branch office customer accounts for three consecutive days. During this period virtually all customer transactions at the affected locations came to a standstill. Customers naturally were frustrated with being unable to access their funds when needed. Check-cashing services, payment reconciliation, and basic processing activities were not possible during this time. The event made the national television news each evening, further putting SifiBank in an unfavorable light. Once the problem in the processing software was found and fixed, the bank was able to address the backlog of customer processing requests; however, by that time SifiBank had determined that the cost of this business interruption was about $250 million, a large portion of which was attributed to lost business revenue during the period as well as deposit withdrawals afterward attributed to poor customer service. At the next board of directors meeting, this event was discussed by management and a recommendation to establish a separate and independent office for operational risk management was made.

According to the Bank for International Settlements, operational risk is defined as the “risk of direct or indirect loss resulting from inadequate or failed internal processes, people, or systems, ...