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Risk in
Financial Institutions
The concept of risk is commonly split into 3 different
domains, generally handled by different people: market risk, credit risk and
operational risk. Whereas credit risk is as old as banking and market risk has
been taking more significance with the collapse of Bretton Woods agreement, an
awareness of operational risk, let alone of holistic risks, is a relatively new
concept to banking and related financial businesses. Introduction
Either accepted as a fact of life, ignored, or just hidden
from public view, operational risk is with us to stay, admitted or otherwise.
Although no operating definition is universally accepted, banks and financial
institutions, under the Basle II accord, will have to convince their regulators
that they measure, monitor and mitigate their operational risks. It would be a
licence to waste money if a financial institution would implement their reading
of Basle II by the letter, merely to please or pacify their regulator. However,
how many institutions are far from this point? We propose an assessment in which we can help an
institution, beyond what is required or not by regulators, detect the
operational risks incurred by the firm, and propose pragmatic solutions to deal
with these risks. Operational risks can be a normal side effect of doing
business, or the unseen consequences of ways of working, or even just phantoms
that certain people like to see once in a while. Objectives and methodology
Our categorisation of risk goes beyond the traditional,
regulation-driven silos of market, credit and operational risks. We include in
our assessment strategy risk and risks linked to corporate governance, so as not
to be limited to “accepted” operations risk domain. These investigations are designed to bring minimal
disruption to the business, and to optimise not only the thought-provoking
elements brought by a consultancy project, but also the post-intervention impact
of our services. This brings, on top of helping in the compliance process and
potentially reducing capital requirements, a new confidence into an effective
risk management process, at a minimal cost and maximal improvement in handling
operational risk. Investigation
-
collection of operational risk information, using formal questionnaires,
interviews and existing formal documentation -
inventory of the main operational risks -
assessments of likelihoods and potential impact -
investigation into past loss data -
benchmarking -
investigations into prevention and mitigation strategies -
implementation of a loss database Others (optional add-ons) -
scorecard -
blending of internal and external loss data -
tail risks Deliverables
-
risk assessment report -
presentation of this report -
risk grading -
outline strategic recommendations Generally, and depending upon the size of the institution
and the depth of the investigation, this assignment takes from 1 man week (with
2 people) to 3 man months. However, every assignment, client and situation is
unique, and necessitates a prior assessment before committing on a particular
time frame. The risk assessment phase is generally followed by a risk
adjustment phase, in which a detailed strategy to address the identified risks
is designed. The Team
For further information on this and our other consultancy
services please contact us via risk_enquiries@value-consultants.co.uk
or the contact details on our home page www.value-consultants.co.uk
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