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Reaping the benefits of operational risk management

Accenture offers a four-phased approach to operational risk management for banks seeking to lower operating costs and improve regulatory compliance.

Overview

When banks consider operational risk, a dedicated risk category in Pillar 1 of the Basel II Framework, they generally focus on regulatory compliance but overlook other aspects of operational risk management (ORM)—including the bank’s risk culture and risk appetite, and a risk focus in day-to-day business decisions.

However, a well-structured and efficiently run operational risk management approach offers a number of benefits. With the right processes in place, banks can free up capital, make better decisions, lower the cost of funds, lower operating costs, decrease profit and loss volatility, increase customer and staff satisfaction, optimize insurance coverage and insurance premiums, as well as better comply with regulatory requirements.

Accenture offers banks a four-phased approach to optimize their operational risk management capabilities—assessing operational risk maturity, performing a gap analysis, identifying actions and creating an implementation plan.

Background

After the introduction of operational risk as a dedicated risk category in Pillar 1 of the Basel II Framework in January 2001, banks began implementing an operational risk framework. This consisted of an operational risk policy, operational risk management (ORM) processes, loss data collection databases, self-assessments, scenario-analysis methods and key risk indicators.

While the original focus of operational risk management was on regulatory compliance, operational risk is mostly about human behavior. However, this aspect of ORM—encompassing a bank’s risk culture and risk appetite, and a risk focus in day-to-day business decisions—appears to have received little consideration. Moreover, banks tend to downplay the magnitude of risks associated with lost income opportunities, reputational issues and credit defaults caused by operational risk events.

ORM functions are often staffed with people lacking the necessary domain knowledge, putting them at a disadvantage when working with business department colleagues. This lack of knowledge has kept operational risk managers from asking the right questions and from proposing the right action steps, keeping ORM from contributing fully to the benefit of the organization by establishing the right kind of risk culture, freeing up capital resources, and minimizing surprises and losses.

Analysis

Some of the potential benefits of a well-structured and efficiently run operational risk management approach include:

  • Freed up capital. The more organized an institution is from an operational risk perspective, the more capital it can allocate to income-earning activities.

  • Better decision making. Simulation results can support better decision-making by providing new insights.

  • Lower cost of funds. Since rating agencies consider effective risk management in their rating process, there is a direct link between the quality of risk management and the rating of the institution.

  • Lower operating costs. Improved controls and monitoring tools can help organizations identify potential risk events before they cause losses.

  • Less profit and loss volatility. Large operational risk loss events can have a significant impact on the volatility of the profit and loss account, resulting, in some cases, in failure to meet earnings expectations.

  • Increased customer and staff satisfaction. It is generally understood that customers and employees prefer to work with or for a financial institution with a low error rate and a reputation for high quality.

  • Optimized insurance coverage and insurance premiums. The more an institution is familiar with its risk profile, the better it can identify its needs in terms of insurance coverage.

  • Better regulatory compliance. The operational risk management function has an important role in helping to assure regulatory compliance, which can be a source of competitive advantage.

Accenture helps banks optimize their operational risk management capabilities using a four-phased approach:

  1. Assess maturity. Identify business needs through interviews with the business managers ultimately responsible for managing operational risks. This step helps ensure that the operational risk management process and the corresponding tools and reports are focused on the business needs.

  2. Perform a gap analysis. Identify and analyze gaps, including those in business domain knowledge, among operational risk management resources.

  3. Identify actions. Identify actions to help close gaps. Actions to help change risk culture, for example, might include re-aligning compensation, preparing a detailed communications program, building risk into decision-making tools, enhancing reporting and tools, enhancing business domain knowledge and performing a cost-benefit analysis.

  4. Plan for implementation. Address the time frame, the necessary resources and the costs incurred, and create documents to present the results to senior management to gain approval for implementing the identified action steps.

Many of these steps take time and require careful organization. However, the benefits of improved operational risk management can be compelling and can help banks create and maintain a competitive advantage through better performance, lower capital costs and enhanced reputation.

Authors

Michael Auer
Michael is a managing director, Accenture Finance & Risk Services, responsible for banking and capital markets in Germany, Austria and Switzerland. Based in Munich, he has nearly 20 years of industry experience in risk management, including market, credit and operational risk. Prior to joining Accenture, Michael held a number of leading roles in the banking industry, including the head of operational risk at a major European bank.

Gerrit Jan van den Brink
Gerrit Jan is a senior manager, Accenture Finance & Risk Services. Based in Frankfurt, Jan has 26 years of industry and consulting risk management experience in the financial services sector. Prior roles include head of operational risk, head of operations and controller at global banks based in Europe. An accomplished speaker and author, he holds a PhD from Erasmus University Rotterdam and is a CPA (Registeraccountant) in the Netherlands.

Eva Mormann
Eva is a senior manager, Accenture Finance & Risk Services based in Zurich. Eva has 15 years of experience in the financial services industry and has held numerous consulting roles primarily in operational risk management and treasury management for financial institutions. Eva’s present focus is on operational risk related topics including cyber-crime, reputational risk management and new developments in the operational risk management space.

Industry & topics highlighted

Financial Services