Operational Risk toward Basel III: Best Practices and Issues in Modeling, Management, and Regulation

CHAPTER 12

Integrating “Management” into “OpRisk Management”

Wilhelm K. Kross

 

 

ABSTRACT

Historically, financial institutions initiated their Basel II operational risk initiatives with a predominant controlling, accounting, and regulatory reporting focus. Carved in stone and prematurely transferred into largely automated information technology solutions, however, incoherent real-life implementation soon resembled a tail wagging the dog. Fairly significant efforts are now required to add a governance framework and to enable corporate leadership teams to truly live up to their responsibilities. In part this requires a rather ineffective relaunch of activities, while other features can simply be refocused or used as they are. To provide a better understanding of a sensible overall direction, this chapter demonstrates how management decision making, operations and change management, strategy development and net value generation perspectives are best integrated into ongoing OpRisk initiatives throughout their respective stages of maturity.

12.1 INTRODUCTION

For good reasons financial institutions historically initiated their Basel II operational risk (OpRisk) initiatives with a predominant controlling, accounting, and regulatory reporting and regulatory capital calculation focus. As a result, however, the second and third pillars of the Basel II framework have been somewhat neglected. Incoherent real-life implementation in some cases resembled a tail wagging the dog (see, e.g., ...