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Managing Operational Risk

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Managing Operational Risk

20 Firmwide Best Practice Strategies

Wiley,

15 min read
10 take-aways
Audio & text

What's inside?

You can’t avoid risk altogether, but you can contain it with sound management strategies.

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Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

Timely and dense, this comprehensive treatment of risk assessment and management maps the minefield of business and financial risks. Although professional-level information on banking and financial risk management cannot avoid a certain intensely mathematical character, this volume also pays careful attention to the "softer" side, and stresses the importance of cultural and attitudinal factors. It is a very well-balanced presentation of the subject. However, this very valuable information is written in a turgid, repetitive, convoluted and confusing style that makes it a chore to read. This risk could have been managed by a ruthless editor able to cut half of the undergrowth to clear a path to the meaning. getAbstract.com’s advice to bankers and risk managers: brew some strong coffee and slog through the text. The content is too important to ignore.

Summary

Defining Operational Risk

Definition is the first step toward managing operational risk. Operational risk includes the risk of losses from business interruption, failures of control, mistakes, misconduct or external factors. This risk breaks down into five distinct categories, which are MECE, meaning "mutually exclusive and collectively exhaustive." Risk can come from:

  • People - Their errors, misdeeds, absences, disputes and other individual doings.
  • Relationships - Investor or customer lawsuits, supervisory actions and so on.
  • Technology - Technological failures, shortcomings, security breaches and so on.
  • Physical - Natural disasters, direct attacks, pollution and other assaults.
  • External factors - Fraud, regulatory changes and other outside events.

These risks manifest themselves in four business processes: origination, execution, management at the line level and management at the corporate level. The origination process involves all activities up to and including consummation of a deal with a client or customer: advisory work, selling, negotiating, structuring contracts and other steps in the process. It includes the...

About the Author

An independent, risk-management consultant and a former Managing Director at Bankers Trust, Douglas G. Hoffman led teams that pioneered risk-based capital models, databases, and operational risk finance and insurance programs. His firm, Operational Risk Advisors, assists financial institutions and corporate clients in assessing, analyzing and responding to operational risk.

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