Abstract
Despite the institutionalization of operational risk management in banks and the strict supervision of bank regulators, operational risk events are still on the increase. It is becoming evident to banks that there is a need to identify the drivers of this risk and nib it at the root to reduce the probability of recurrence. Hence, this study examined the drivers of operational risks in Nigerian commercial banks and the extent to which each driver contributes to operational risk. To achieve the study’s objectives, primary data were collected from the Operational Risk Management Desks of six (6) sampled commercial banks and analyzed using SPSS and Microsoft Excel. The result showed that Internal processes, IT systems and Quality of Risk Officers are determinants of operational losses in banks. The internal process was however indicated as having the most impact. The study concluded that Internal Process is the major driver of operational risk in Nigerian Commercial banks. The researcher, therefore, recommends that bank management must have defined procedures for core activities and prioritize regular review of their critical processes to reduce operational risk events and the associated costs.
Highlights
In prior decades, banks had focused more on the traditional credit risk and market risk areas
The analysis revealed that 28% of the respondents agreed that processes/policies/procedures are clearly documented and made available to all staff, 62% respondents strongly agreed while 10% respondents were neutral. 19% strongly agreed, 47% respondents agreed, 24% respondents were neutral, while 10% disagreed that all processes/policies/procedures/controls are regularly reviewed to reflect changes in the business environment
The results revealed that 47% of the respondents strongly agreed, 24% agreed, 5% were neutral, 14% disagreed while 10% strongly disagreed that basic services can be provided to customers when there is a prolonged system downtime. 67% of the respondents strongly agreed while 33% of the respondents agreed that inadequate data security exposes the bank to operational losses; 57% of the respondents strongly agreed, while 43% of the respondents agreed that bank has reasonable measures in place to prevent data loss or data interruption or unauthorized access to its network
Summary
Banks had focused more on the traditional credit risk and market risk areas. Public data indicated huge operational losses spanning from the £8.2m and $187.5m penalties paid by Aviva and Wells Fargo respectively in 2016 for failure to maintain adequate internal controls and manage their operational risks; $880m fraud loss of Catalunya Caixa (a Spanish bank) in 2017; and the $5.5b and $2.2b fraud losses in PrivatBank and Punjab National Bank in 2019 (Risk Net, 2018; Risk Net, 2019). These losses have both financial and non-financial implications on banks. One would have expected that factors such as; availability of historical information on operational loss events, proliferation of operational risk management practices and the stiff penalties imposed for not complying with applicable regulatory directives would have reduced the frequency
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