With the growth in technology and globalization, many organizations are shifting their focus on reducing the operational risks. A realization has dawned upon the organizations that the volatility in the earnings may not be due to the financial risks of the firm, but the manner in which the firm operates. Mitigating operational risk will help the organizations in increasing their shareholder value. Though the Basel Committee has prescribed a number of approaches to tackle these risks, there still exist certain deficiencies and gaps.
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Operational risk is not new. It is as old as human civilization. What is new about it, now, is its elevation to the level of a discipline for management and mitigation purposes. As the risk onion "peels", the top layers of credit and market risks have been identified without much of tears. As the approaches to their management became more sophisticated, further "peeling" became necessary which led to lots of tears as "other risks" were bared, staring the face. Solid among these "other risks" is "operational risk". Then, the question is why has it taken so long to recognize its serious nature by both the regulatees and the regulators worldover? The answer, partly, lies in the fact that it is less "interesting" to the financial institutions as its management, apparently, devolves as a cost without visible benefits. The financial institutions' risk-return frontier gets pushed out when credit and market risks are taken on. They get paid for that risk taking unlike in case of operational risk which involves visible costs but invisible benefits. It is, perhaps, for this reason, "it has not generated the same degree of enthusiasm (even) at the board level(s)". The other reason, for the sudden awareness and concern of operational risk, is the recent loss of such high profile banks as the Barings, Daiwa, Sumitomo and Deutsche Morgan Grenfell. |
