Use test : the need for banks to demonstrate that risk management processes are truly integrated into the management of the business. The real use test: giving the business a risk framework that they can actually use.
Operational risk management is at a crucial point in its development. Numerous approaches have been developed across the industry, but many institutions are struggling to make them fully effective by really embedding them into the day-to-day management
of the business.
In order to overcome this challenge, it is first essential to define clearly the relationship between operational risk processes and the overall control environment (see Figure 1), and to establish crucial links between different operational risk processes.
The effectiveness of operational risk management has been impeded by the common failure to embed operational risk truly into the overall management of risk and control. Group risk functions must demonstrate to business unit staff the full potential of using operational risk processes, developed under the group framework to manage the actual risk in the business. Our experience is that without this, business units resort to developing their own processes for managing operational risk and control, while paying lip service to the group framework for internal compliance purposes.
The principal reasons for this are:
- Key risk indicators are often insufficiently linked to underlying risk assessment to provide effective risk monitoring.
- Risk assessment processes often fail to provide an effective means of understanding the operational risk profile or a practical tool
- for driving control improvement actions and consequent reductions in allocated capital.
- Loss data collection often provides a oneway feed into an ‘invisible’ group model, rather than being used by the business to
- identify areas of control weakness.
- Operational risk quantification is often viewed as irrelevant to the day-to-day management of risk.
How we can help you
The operational risk team at PricewaterhouseCoopers has extensive experience in the design and implementation of operational risk frameworks, from the simplest to the most sophisticated approaches. We place significant importance on creating and demonstrating
the links considered here and would be pleased to discuss any of the issues addressed in more detail.
Crucial links
To make operational risk management effective in the business units it is essential to understand:
Link 1 – Operational risk is often viewed in isolation from, rather than integral to, all other risk types and those overlaps that are
observed in particular with credit and market risk are understated.
Link 2 – The important links between the key operational risk processes.
Clearly articulating these links is crucial to demonstrating that, when working effectively, operational risk processes can provide
a single-minded and coherent approach to managing risk and control, leading to the natural embedding of operational risk into
managing the business.
Download our e-brochure for a graphical representation of Operational Risk Management. [Download brochure | 342kb ]
