Managing Operational Risk in Financial Markets

•

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

skills.

•

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

structure.

•

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

110

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

111