Operational Risk Management

Introduction

After the final implementation of the Basel II requirements in national legislation for almost two years the question arises how to continue in the operational risk area. Some banks have chosen for an approach, which has a focus on the regulatory compliance only. Unfortunately no significant progress can be made in such cases. It appears to be a challenge to interpret operational risk information in order to derive the right operational risk management alternatives.

Operational risk management should be moving to the next stage:

delivering value to the company by conserving its net worth.

The target cannot be achieved by a central function only. Nowadays operational risk management needs to be practised at all management levels of the organisation. The risk perspective should become natural in management decision making.

From ORM to ICAAP: a holistic risk focus

The subprime crisis, the big trading loss at Societé Générale and other cases showed that a holistic risk focus is unavoidable. The good question is: Who will deliver that risk focus? If the various risk models are considered: credit risk, market risk and liquidity risk models are rather specific and therefore not equiped for a holistic risk view. The operational risk model is more generic and therefore could serve as a model for ICAAP. If the operational risk framework is broadened, it can evolve to the next stage being a holistic model.

Solvency II: OR Management in insurance companies and pension funds

The first draft of the Solvency II directive has been issued in July 2007. The second draft has been published in February 2008. Operational risk management is required for insurance companies and pensionfunds and regulatory capital requirements will e implemented under Solvency II, which is expected to be concluded in 2009 in the European Parliament.