Growing importance of operational risk for banks will result in banks adopting a systematic approach
The growing importance of operational risk for banks is promoting a step change in the way it is managed. Long gone is the siloed backward looking approach and instead banks are moving towards a culture in which operational risk is managed in a proactive and strategic way on an organization wide basis. That’s according to a new white paper from Wolters Kluwer which examines key operational risk trends, arguing that banks should adopt a systematic way of understanding, managing, analyzing and mitigating operational risk across an organization.
There are four key drivers behind this increased focus on operational risk, according to the white paper titled “Operational Risk in the Spotlight.” Firstly, one of the most powerful arguments for strengthening operational risk management is the size of modern day regulatory fines. Penalties for operational failings have reached a level where they are having a material impact on firms’ profitability and so a strong operational risk process becomes an integral aspect of good governance across the organization.
Another trend driving this message home is the growing emphasis on personal accountability. Last week (7th March 2016), for example, saw the introduction of the Senior Managers Regime and Certification Regime, designed to instill a strong culture of operational accountability at the most senior levels in UK banks. Senior executives and non-executive directors are now personally responsible for strategic decision making across an organization.
Add to this the growing complexity of modern banking operations, run on an ever increasing number of IT systems, and it’s clear to see that banks now require a full picture of operational risk exposure across all fragmented operations.
The final trend leading to an increased focus on operational risk is banks’ desire to rebuild reputations. The post financial crisis world, in which regulators and politicians continue to argue they can’t loosen their grip on the industry until it cleans up its act, means there is a strong incentive for firms to evaluate their current operational risk management approach. They would be well advised to put in place an organization-wide framework that will not only prevent failures from occurring but will also provide evidence to regulators that appropriate controls are in place, the white paper notes.
“Increasing financial penalties, a growing emphasis on personal accountability, the complexity of banking operations and a desire to rebuild reputations are all leading banks to focus on operational risk practices like never before,” comments Brian Gregory, London-based vice president, Non-Financial Risk/GRC at Wolters Kluwer and author of the report. “It’s no longer acceptable or desirable to leave the management of individual types of operational risk to individual departments. Rather, there must be a systematic approach and those institutions that successfully embed operational risk management within a robust governance framework will reap benefits ranging from easier compliance and reporting to stronger financial performance.”
As part of Wolters Kluwer’s ongoing strategy to educate the financial industry on the benefits of adopting a systematic approach to operational risk, the firm is also sponsoring this week’s New Generation Operational Risk 2016 Conference, being held in London. The second day of the event, organized by the Center for Financial Professionals, will be chaired by Gregory and will include presentations and debates from leading practitioners. Gregory will also deliver a presentation examining the Management of Operational Risk in Regulatory Change.