Questions must be asked around Operational Risk to challenge the way in which it is being approached today;

• If the spirit of the Accord is the better management of your business – what is the best way to approach this?
• Does the collection of loss data and the calculation of a specific capital charge for operational risk, apart from satisfying part of the regulatory requirement, follow the spirit of Basle?
• While market and credit risk are part of a bank's core business (without taking on risk, a bank can't earn its cost of capital), operational risk is not and this implies that operational risk needs to be handled differently to market and credit risk. Rather than simply adding it to the capital adequacy formula. Ask yourself: What would my CEO do with a VaR figure for Op Risk? What would it tell him/ her?
• How does measurement and modelling help to control the business? Can Operational Risk be used to make your business more profitable?
• Measurement, by its’ definition, is reactive rather than predictive. Should we not be trying to actively prevent losses, errors, frauds rather than just measure them?

Another issue that needs to be addressed is that, in order to qualify for use of an A.M.A. approach to Operational Risk, the following stipulations in Pillar 2 of the Accord must be adhered to:

• "The banks internal operational risk measurement system must be closely integrated into the day-to-day risk management processes of the bank. Its output must be an integral part of the process of monitoring and controlling the bank’s operational risk profile"
• "There must be regular reporting of operational risk exposures and loss experience to business unit management, senior management, and to the board of directors"

Does your institutions current Operational Risk process adhere to this guideline? Cisco, by using a progressive "Operational Risk and Efficiency" system, has a quarter end close cycle of 4 hours with daily amalgamated management accounts are produced within hours of close – can you do the same in your Institution?

Operational Risk cannot be treated like credit or market risk. Loss number crunching must therefore be seen as a useful tool to ring alarm bells internally, but must not be used as a proxy for future losses

Problems faced by Operational Risk practitioners today

As a result of the current views of the Financial Services Industry on Operational Risk the following are a list of issues facing many Operational Risk departments today;

1. Seen as a cost center – only needed due to regulatory compliance
2. Understaffed – mainly due to 1.
3. Senior management are not involved to a sufficient depth as just "regulatory issue"
4. Line management have not bought in as "it’s just mathematics, no relevance to my business"
5. Loss data is not:
   1. Readily available
   2. C omplete
   3. A ccurate
   4. V alid
   5. E videnced
6. Accuracy of scorecard information is debatable, or difficult to independently verify, due to method of collection

By implementing an Operational Risk program that focuses not only on the regulatory directive but also the underlying business issues the following can be achieved;

• Lowering the capital charge around
  • Expected Losses
  • Unexpected Losses
  • Extreme Loss
• Adherence to Pillar 2 supervision which can act as conduit for improved management information/ branch supervision
• Improve Operational Efficiency
• Enforcement of SLAs
• Lower actual resultant losses through the use of predictive analysis
• Reduce infrastructure and people costs
• Highlight areas for increase revenue opportunity
• Aid in re-pricing offerings as a result of Operational Loss and profitability information
• Reduce strategic and reputational risks