Other approaches

Other approaches
Dr Jack King of Algorithmics has developed a general operational risk approach and
proposes the following definition and criteria for operational risk: ‘Operational risk
is the uncertainty of loss due to the failure in processing of the firms goods and
services.’ For a full discussion of the rationale and consequences of adopting this
definition, see his article in the January 1999 edition of the Algorithmics Research
Quarterly.
Peter Slater, Head of Operations Risk of Warburg Dillon Read, recently spoke at
the IBC conference on Operational risk in London (December 1998). At that conference
Peter explained that his bank split risks into the following categories:
Ω Credit and Settlement
Ω Market
Ω Operations
Ω Funding
Ω Legal
Ω IT
Ω Tax
Ω Physical and crime
Ω Compliance
He defined operations risk narrowly to be the risk of a unexpected losses due to
deficiencies in internal controls or information systems caused by human error,
system failures and controls. The scope of operations risk in Warburg Dillon Read is
confined to the risks in their definition applied to the back office. The advantage of
this approach is that it allows the back office management of the bank to focus on
the critical areas of operational risk applicable to their department. The disadvantage
is that other operational risks may not be managed in the other categories and
unexpected losses may occur without being captured by the other risk management
or business activities.
Many banks are now differentiating between controllable and uncontrollable risks.
Controllable risks are those where bank actions can influence the outcome so the
risks can be mitigated without (normally) resorting to the involvement of a third
party. Uncontrollable risks are those that cannot normally be ‘internally controlled’
by the firm. Common risk mitigation techniques for uncontrollable risks are:
Ω Insurance for earthquakes, floods or other natural disasters
Ω Allocating the risks to a captive insurance company
Ω Outsourcing to a third party.