There are numbers of major losses had to face by the national and international organization in the month of November for example:
- The State Bank of Pakistan (SBP) had fined Habib Bank Limited (HBL) an amount of Rs35.62 million on October 4 for violating regulations.
- The Libyan Investment Authority (LIA) has sued Credit Suisse Group in London after a bribery case as part of a long-running fight with US and European banks over bribery allegations,
And these losses were faced due to the lack of operational risk management. Operational risk management is very important in every organization but because we are talking about banks so we should stick with banking risk.
The main question which comes in our minds “what is the operational Risk”
Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies.
- Employee errors
- Systems failures
- Fraud or other criminal activity
- Any event that disrupts business processes
Most organizations accept that their people and processes will inherently incur errors and contribute to ineffective operations. In evaluating operational risk, practical remedial steps should be emphasized in order to eliminate exposures and ensure successful responses. Poor operational risk management can hurt an organization’s reputation and cause financial damage. How much loss an organization is prepared to accept, combined with the cost of correcting those errors, determines the organization’s risk appetite.
Operational Risk in Banking Industry:
Two key risks that all banks face are operational risk and business risk. Every banking transaction involves a number of steps. Most of the time, we fail to appreciate the complex set of steps that goes into every transaction. This is because the transactions complete instantaneously. However, a lot goes on behind the scenes to make our banking transactions easy and quick. As with every process, banks’ operations may not complete as desired if they’re not executed properly. Operational risk can lead to a bank’s collapse.
The closure of First NBC Bank in 2017 is an example of operational risk resulting in a bank’s failure. The regulators seized the bank’s assets after it failed to maintain sound accounting practices. It also fell short in fulfilling its regulatory capital requirements.
Challenges of managing operational risk:
A German bank accidentally transferred more than 5 billion euros to four other banks due to some internal system issues. Interestingly, this is not the first time for this bank. Even earlier, just when Lehman Brothers filed for bankruptcy in 2008, the bank transferred 320 million euros to Lehman Brothers. Some other banks have also faced similar situations in the past. These incidents highlight how critical it is to manage operational risk within an organization. More importantly, in a world where technology is growing at a very fast pace, managing efficient IT systems become a matter of paramount importance.
Senior Management of the bank should form a detailed Operational Risk Management policy (Covering IT System Risks too) and this should be reviewed at a periodic interval to accommodate updated risk assessment and risk mitigation policies. This will help to avoid unwanted regulatory audits, stringent capital requirements and more importantly, any damage to the reputation of the bank.
What is RiskCheck?
RiskCheck Operational Risk newsletter is published monthly. It keeps you abreast with the latest news, events and external risk exposures which could potentially impact your organization. Both national, as well as international potentially high-risk events, are covered in this newsletter.
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NewYork Times, The International News, BBC, Dawn News, Business Recorder, Tribune, The Nation, American Banker, Belleville News-Democrat, Bank for International Settlements, Harvard Business Review, Federal Reserve, Telegraph, Norman Transcript, Indian Express, Buffalo News, US news, Ottawa Citizen, LA Times, Chicago Tribune and ABC.