Abstract
Studies on the management of operational risk in financial organizations have predominantly utilized quantitative and probabilistic approaches. Such approaches provide managers with a way to estimate the probability of operational failure occurring but do not provide insights with regard to specific managerial actions that can be taken to avoid the occurrence of such failure. Results of our study of the processes of a large Brazilian banking institution suggest that HRO theories can make an important contribution to the effective management of operational risk. Understanding the underlying causal mechanisms that contribute to operational failures makes it possible to take steps to manage them and to reduce the probability that they will occur. In addition to suggesting a new approach to the management of operational risk in financial institutions, the study tested HRO theory in a new sector. The results clearly demonstrate that HRO concepts are relevant in financial institutions, broadening the scope of applicability of this theory.
Highlights
The Basel Committee on Banking Supervision was created with the mission of establishing patterns of operations for the minimization of risks and the provision of greater stability to the global financial system
This traditional English financial institution failed due to the loss of ₤869 million from operations carried out by one employee. This case revealed that Barings Bank had deficiencies in its internal processes, flaws in its internal controls and lacked mechanisms to protect against internal fraud, situations not contemplated in the 1988 document
The evidence of the study clearly demonstrates the relationship of the operational losses experienced by Zeta Bank in its Brazilian System of Payment (SBP) and Credit Operations processes to causes of operational failure predicted in the High Reliability Organizations (HROs) literature, permitting an affirmative answer to the first of the research questions addressed
Summary
The Basel Committee on Banking Supervision was created with the mission of establishing patterns of operations for the minimization of risks and the provision of greater stability to the global financial system. After the publication of these standards and the adoption of the preventive measures contained in the document, cases involving risk problems occurred in financial institutions, foremost among them being the Barings Bank case. This traditional English financial institution failed due to the loss of ₤869 million from operations carried out by one employee. This case revealed that Barings Bank had deficiencies in its internal processes, flaws in its internal controls and lacked mechanisms to protect against internal fraud, situations not contemplated in the 1988 document. The Barings case, was not an isolated one. Marshall (2001) presents various other examples of large-scale financial losses resulting from fraud and flawed internal processes
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