Operational risk is perhaps the most
significant risk organizations face. Virtually
every major loss that has taken
place during the past 20 years, from Enron to Worldcom
and Baring’s Bank, has been driven by
operational failure. Many financial institutions have spent tens of millions of
dollars trying to develop a robust framework for measuring and managing
operational risk. Yet, in spite of this huge investment, for many firms developing
a viable operational risk management (ORM) program remains an elusive goal. Why
is this so? A lot has to do with the way organizations have approached this problem
and the underlying assumptions they have made. Many financial firms believe
that operational risk is not a material risk. This can be seen in the low
capital charge allocated to this risk relative to
other risks (e.g., 15% to 20% of
total economic/regulatory capital). Many view operational risk as just
back-office operations risk, and executives generally believe that ORM is
fundamentally about managing control weaknesses in the processes at a tactical
level. These views have largely shaped funding and staffing decisions, which
have in turn affected resource allocation and methodology development.
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