Managing Operational Risk: Risk Reduction Strategies for Investment and Commercial Banks - Softcover

Chorafas, Dimitris N.

Softcover

ISBN 10: 1855648911 ISBN 13: 9781855648913

Publisher: Euromoney Institutional Investor PLC, 2002

Synopsis

Recent collapses of financial institutions show how operational risk should take an equal place alongside credit and market risk in the risk management strategy of all financial institutions.

This new book is an invaluable guide to operational risks and their mitigation. Divided into four sections it begins by identifying 12 factors which characterise operational risk. The first section examines operational risk in the contexts of merchant, corporate, investment and private banking and the insurance industry. The second demonstrates how operational risk can be managed and controlled and examines cases of operational failure, including Credit Lyonnais and NatWest Markets. The third identifies legal risk including cross-border conflicts of law, compliance and taxation issues and environmental factors. The final section assesses the risk in payments and settlements including dematerialisation, the role of IT solutions, handling intraday exposure and delivery vs payment issues.

Every financial institution should understand and protect against these risks and this unique and timely guide will ensure you establish an effective strategy for managing operational risk.

About this title

Review

"...another tour de force on the part of Dr. Chorafas.......the true nature and ramifications of operational risk are superbly illustrated" -- Gunnar T. Andersen, Managing Director & Member of the Executive Board, International Banking & Treasury

From the Author

PREFACE

Classically in the finance industry, operational risk has taken the back seat to credit risk and market risk, but since the late 1990s this has been changing. Prompted by the 1999 New Capital Adequacy Framework issued by the Basle Committee on Banking Supervision, financial institutions are reviewing regulatory guidelines and best practice prevailing in the banking industry, and aiming to help themselves develop solutions for operational risk management.

A fundamental understanding of both the type and quantity of operational risk taken by credit institutions and brokerage firms, and of the methods of controlling it, is essential as the industry faces up to increasingly demanding challenges. The fact is that the extent of operational risk exposure being taken may go unnoticed and unchecked until it reaches a level that represents an unacceptable threat to an institution's company's operations. This book is written for investment bankers, commercial bankers, loans officers, traders, treasurers and other practitioners in the financial industry, and also for members of the board and senior managers who want to take a proactive stance towards the control of operational risk. In Part 1, Chapter 1 provides factual and documented evidence of how financial institutions define and manage operational risk. The definition of operational risk outlined addresses today's interconnected environment in which all sorts of business risks are multiplying at an alarming rate. Barings in the United Kingdom and the Bank of New England in the United States, like a number of other institutions, crashed due to failures in the management of market risk and operational risk. A similar synergy exists between credit risk and operational risk.

While no two banks have the same notion of what constitutes operational risk, or even the same terminology, there is a convergence of opinions, most pronounced at senior management level. The main elements are a lack of professional skills, organisational weaknesses and execution risk, the origin of which may be either internal or external. Based on the research responses, the following 12 factors demonstrate the range of operational risk:

The text pays particular attention to prudential regulation and the impact of securities lending on operational risk, as well as the conflicts of interest that might result from such lending. Senior managers of credit institutions are urged to ask themselves a number of critical questions as part of risk analysis: What is the likelihood of each type of incident occurring? What can go wrong? What is the impact of each operational risk? How can it be prevented or minimised? Who would be accountable if it takes place?

The answers to these questions help us decide about what we really should do as contrasted with what we are trying to do. They also make it possible to come to a view on what is an acceptable level of operational risk. Once we have identified all the potential risks of running our business, we can get busy testing for each potential vulnerability, providing cost/effective solutions based on our findings.

I am indebted to 161 knowledgeable people and 84 organisations, for their contribution to the research that made this book feasible. Also to several senior executives and experts for constructive criticism during the preparation of the manuscript. The complete list of people and organisations who participated to the research is shown in the Acknowledgements. Let me take this opportunity to thank Jacqueline Grosch Lobo, David Rathborne of Euromoney Books for suggesting this project and guiding it all the way to publication, and Kim Gross for her work in managing the production. To Eva-Maria Binder goes the credit for compiling the research results, typing the text and drawing the exhibits.

Dimitris N. Chorafas Valmer and Vitznau December 2000

Edition details

• Publisher: Euromoney Institutional Investor PLC
• Publication date: 2002
• Language: English
• ISBN 10: 1855648911
• ISBN 13: 9781855648913
• Binding: Paperback
• Number of pages: 276