The key to implementing bank-wide operational risk management

In our experience, eight key elements (Figure 12.4) are necessary to successfully
implement such a bank-wide operational risk management framework. They involve
setting policy and establishing a common language of risk identification. One would
need to construct business process maps as well as to build a best-practice measurement
methodology One would also need to provide exposure management as well as
to allocate a timely reporting capability Finally, one wouyld need to perform risk
analysis (inclusive of stress testing) as well as to allocate economic capital. Let’s look
at these in more detail.

Clear guiding principles for the operational risk process should be set to ensure
that it provides an appropriate measure of operational risk across all business units
throughout the bank. These principles are illustrated in Figure 12.6. Objectivity
refers to the principle that operational risk should be measured using standard
objective criteria. ‘Consistency’ refers to ensuring that similar operational risk profiles
in different business units result in similar reported operational risks. Relevance
refers to the idea that risk should be reported in a way that makes it easier to take
action to address the operational risk. ‘Transparency’ refers to ensuring that all
material operational risks are reported and assessed in a way that makes the risk
transparent to senior managers. ‘Bank-wide’ refers to the principle that operational
risk measures should be designed so that the results can be aggregated across
the entire organization. Finally, ‘completeness’ refers to ensuring that all material
operational risks are identified and captured. 355