1 - The operational risk universe

Abstract

While it is a fact that operational risk has been around as long as both market and credit risk, it is only recently that the financial services industry has truly recognized the risk present in an “operational” environment. Many would attribute the recognition of operational risk to the activities of organizations and individuals in the 1990s that led to a string of high profile financial disasters, notably the rogue trader Nick Leeson. Another example of operational risk awareness would be the more recent changes in retail banking as the traditional high-street banking was supplemented by the advent of electronic banking, cash machines, and a whole range of Internet-based savings and borrowing facilities. While there was certainly an awareness of a heightened risk situation among operations and administration managers, it was still not accepted or recognized in most organizations at senior management level that the risk could be so severe that a business could be devastated by it. Today, there is a widespread recognition of the subject of operational risk and the need for operational risk management (ORM). The regulatory and business drivers behind ORM continue, so that more benefit is provided out of the need to address ORM. Techniques, while still evolving are also mature and to some extent proven. Loss and incident data has been collected over several years and now forms a realistic and credible database for measurement and assessment.