DEVELOPMENTS IN THE FINANCE SECTOR
Risk is an everyday hazard that faces banks, funds and insurers. It can usually be mitigated, but it is rarely eliminated completely. There are some cases where a positive “hazard” is a very good thing to have – each business faces a risk or probability of making profits. Millions of people buy lottery tickets each day facing the small risk that they will become instant multimillionaries. Business always encounters some form of risk.
It is good that we recognise that operational risks are present in our company. It is better when we can predict the risk event that will happen. It is best when we have reinforced the general resilience of our system through risk management countermeasures. The business operational risk shock is going to be absorbed by our company, so the company has to respond. Not all banks have put operational risk firmly on their corporate radar. Few banks seem to have detailed an operational risk map by making provisions for expected operational risk. Basel surveyed 89 banks, and only 33 had designated expected operational risk loss measures.
Therefore, we need a management structure to plan the continuing and increasing system resilience of the company.
Doing risk management, rather than merely talking about it, will separate the banks from the boys for Basel II implementation. The measures of pricing, reserving and expensing for OpRisk are already one significant step ahead of risk managers simply answering:
We are risk-compliant because we have already submitted the Risk Compliance Report.
This reporting for the sake of reporting is a risk-ignorant form of control activity in a mindless ticking of boxes in a questionnaire. Will reporting and complying with the regulations catch out the next Enron?
The above techniques get us closer, may be, to a real-life model of risk management that we call ‘organic’. Basel II reaches for some risk silo integration, but real life is messier. Messy problems can be handled in a project management control structure, such as RAMP. An investment company, with its people and processes, its clients and their investment needs and preferences, is like a living organism. It can encompass every type of business risk, instead of just the ones we would like to handle. We see that there are many organic risk stakeholders at play in the market.
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