Hire, support and retain staff at all levels of the organization
with an appropriate level of skills and expertise.
Establish training and development programmes that will
allow the staff to continuously develop and improve their
Invest in an enterprise-wide risk-monitoring system, that has
the capability to integrate data from the various product line
systems to provide a consolidated view of the organization’s
exposure. The individual product line systems need to encom-
pass sophisticated risk models and have the capacity to handle
high-volume, high-speed transactions.
Establish a management structure with appropriate checks and
balances, between front and back office.
Establish an independent risk management organizational
Adopt an integrated approach to market, credit risk and oper-
ational risks.
It will be this flexibility that will ultimately allow the organization
to respond to the changing market and customer requirement.
Risk management culture
The concept of risk management within the financial industry has
frequently been associated with financial loss or fraud, e.g.
Barings, Sumitomo, Orange County etc. Risk management gener-
ally, and operational risk in particular, really comes into focus
when something has gone wrong, or when an organization has
suffered a substantial loss. As a result of this, there is often a pre-
occupation with and excessive focus on administrative processes
and controls, rather than outcomes and performance. As the
financial business has become more complicated and global, it has
generated greater risk management problems. However, because
Managing Operational Risk in Financial Markets
Risk management culture
of this fixed mindset and paradigm paralysis, with each new
problem, the cry goes up for greater levels of control, more rigid
hierarchies and less staff empowerment. Rather than solving any
problems, this approach creates fear, uncertainty and suspicion
among the staff. This merely serves to drive the problems under-
ground, creating a much bigger risk management nightmare.
Organizations need to break out of this cycle and explore differ-
ent ways of managing risk. In some cases the term risk manage-
ment is rather misleading. The process of risk management does
not necessarily focus on the management of risk, which is uncer-
tain and unpredictable in nature, but on the capability of the
organization to operate effectively in a changing and uncertain
environment. Managing risk is actually about managing the
organization: planning, organizing, directing, and controlling
organization systems, processes and resources to achieve the orga-
nization’s objectives. Effective risk management requires develop-
ment of the organization’s systems, processes, and resources to
change the organization and its responses to the its environment.
The organization needs to develop a risk management culture
where risk management is seen as the responsibility of the staff at
all levels of the organization. This means that systems and process
are designed with risk management in mind and staff development
and training focuses on effective risk management practices. The
risk management process needs to involve continuous measuring,
monitoring and controlling of all risks within the organization.
The risk oversight responsibility of the management needs to be
clearly defined and communicated.
An organization will only be able to manage risk effectively if its
management and staff want to. While the regulators may insist on
expensive value at risk type systems or force the organization to
develop comprehensive procedures and operational instructions,
these activities do not in themselves lead to effective risk manage-
ment. It is the individuals who have to decide whether they are
7 Managing operational risk
Risk management culture

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