Relentless change in the financial services world means
the operational risks that financial institutions face
can alter rapidly and may not be adequately understood
and/or controlled. Traditional approaches to operational
risk, including internal audit, are often no longer fully
adequate.
Regulators are placing an increased emphasis on the
control responsibilities of Boards of Directors and
Senior Management. Directors and Senior Management need
a means to ensure and demonstrate control over major
operational risks across the organisation at any point
in time. (Review the Turnbull Report, April 20th 1999.
and Basel Capital Accord.)
Operational
Risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems or from
external events
The idea to incorporate regulatory capital allocation
for operational risk has been indicated by the Basel
committee within their June 4th consultative paper.
"The committee acknowledges the importance of risks
other than credit and market risk for banks, and believes
that a rigorous control environment is essential to
prudent management of, and limiting of exposure to,
such risks; however, additional steps are necessary
to ensure the sound management of banking institutions.
Analytical approaches for managing this broad category
of risk are currently in the early stages of development.
For example, most banks have only recently begun to
develop a framework for explicitly measuring and monitoring
operational risk.
The Committee proposes to develop an explicit capital
charge for other risks and is exploring ways in which
this could be done in practice. However, in the absence
of industry standard practice, operational risk will
be difficult to incorporate into the risk based capital
framework in a truly risk-sensitive manner. The Committee
is soliciting comment on various approaches to achieve
this objective". (www.bis.org).
Amelia Financial Systems would like to work with the
Committee and interested financial institutions to develop
the capital framework.
In response to the above factors, many financial institutions
are now introducing more disciplined approaches to operational
risk management. Frequently under the direction of a
senior management.
To support these new initiatives there is a compelling
requirement for an integrated systems approach. The
chosen system needs to have the architecture to support
and address ever-evolving requirements into the long-term.
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