Operational Risk Management Framework Research Articles

Operational Risk Management in Banks: A Bibliometric Analysis and Opportunities for Future Research

The last few years have witnessed tremendous challenges in the management of operational risks faced by banks and the emergence of newer risks. The working models for bank staff are now different; additionally, there has been a massive increase in the digitization level. All these aspects make operational risk management in banks an attractive field of study. There is a need to perform systematic bibliometric analysis in this research area, providing the various trends and highlighting areas for further research analysis. This research paper has examined the various aspects of operational risk management in Banks by performing a thorough bibliometric analysis of 676 articles extracted from two data databases, i.e., Scopus and Web of Science, from 2010 until March 2023. These were analyzed using the tools Biblioshiny and VOSviewer. Various bibliometric techniques like analysis of trends, citations, contributing authors, keywords, and bibliographic coupling have been performed. This research paper has significant theoretical and practical implications which can assist future researchers. Operational risks are ever-dynamic, and five themes, i.e., climate risk, information security risks, geopolitical risks, third-party risks and compliance risks, have been identified in this research paper as key focus areas for conducting research in the future. The findings of this study and suggestions for future research will be useful to academicians, policymakers, and operational risk management professionals for identifying potential areas of collaboration in the future to strengthen the operational risk management framework.

Operational Risk framework and Standardised Measurement Approach (SMA)

On December 2017, the Basel Committee published the “Basel III: Finalising post-crisis reforms” (also known as Basel IV) that introduces the Standardised Measurement Approach (SMA) to define the Pillar I operational risk capital requirement that is foreseen to entry into force on the 1st of January 2025, replacing all the existing approaches. This approach not only introduces a new method to be used to calculate the operational risk capital requirement but details several updates that have to be applied to the main components of the framework such as Governance, Loss Data Collection and Risk Self-Assessment. With the entry into force of the SMA, banks have the chance to fully re-think their operational risk Management Framework (ORMF) integrating the different components and making it more efficient and effective in terms of data governance, process management and reporting. This paper describes the SMA methodology to be implemented to calculate the Pillar I operational risk capital requirement and provides an overview of the expected impact on the different components of the ORMF of the banks.

Loss control case reports to OPE25 on FinTech for SOX ratio to consider for solvency and insurance underwriting

AbstractWith the OPE25 we now have a 3rd ratio for the capital structure: Economic Capital/Incentivized Pay. The SOX ratio is the financial instrument for internal audit, solvency monitoring by the investor and banking supervision for OPE—Calculation of RWA for operational risk, new version in force on January 1, 2023. It is part of the entity's process to meet the three minimum conditions required by BCBS for the use of the standardized approach: (a) Its board of directors and senior management, as appropriate, are actively involved in the oversight of the operational risk management framework; (b) It has an operational risk management system that is conceptually sound and is implemented with integrity; and (c) It has sufficient resources in the use of the approach in the major business lines as well as the control and audit areas. Equity corresponds to the means made available to a bank by its shareholders or other investors, as well as to the profits it has made, and which have not been distributed. Economic Capital (EC) belongs to this last category of means. The OPE30 in force so far based on the mathematical approach (statistics and probabilities), will expire on December 31, 2022.

Operational Risk Management of Public–Private Partnership Infrastructure Projects: A Bibliometric Literature Review

Public–private partnerships (PPPs) are widely applied in the procurement of capital infrastructure, encompassing phases such as financing, design, construction, operation, and transfer. Of these, the operational phase of PPPs is particularly critical to project success given this is when revenues are generated, and costs recouped. However, the revenue stream will be exposed to numerous risks over the relatively long period of infrastructure operation. Management of PPP operational risk is therefore critical. Despite this importance, research dedicated to PPP operational risk management remains limited. Thus, this paper addresses this deficiency by systematically reviewing related studies and proposing an operational risk management framework. A qualitative bibliometric literature review is conducted on 60 papers pertinent to operational risk management, published across 12 peer review journals. Findings reveal that the industry lacks a systematic operational risk factor list, while the impacts of risks are rarely considered when allocating operational risk factors, and moreover that the research on the selection and efficacy of operational risk management strategies remains undeveloped. This study reveals where further efforts in the research of operational risk management of PPP infrastructure projects could be more fruitfully applied.

Do operational risk and corporate governance affect the banking industry of Pakistan?

Abstract Purpose – Due to increase in operational risk, banks are facing huge losses. In order to avoid losses, banks need to manage operational risk. This study aims to analyze the impact of operational risk management (ORM) processes, which include identification, assessment, analysis, monitoring and control in the presence of corporate governance (CG) that can also contribute to effective ORM practices. Design/methodology/approach – Operational risk management processes are used to manage operational risk along with CG. Primary data are collected through questionnaire from (167) operational risk managers of commercial banks. Multiple linear regressions has been run to analyze the data. Findings – Results indicate significant impact of CG and operational risk identification (ORI), monitoring and control on ORM practices in commercial banks of Pakistan. Originality/value – The study suggests policy makers to improve the ORM framework by CG. Beside this, in order to lessen operational risk, proper identification, monitoring and control of operational risk could also contribute.

Do operational risk and corporate governance affect the banking industry of Pakistan?

PurposeDue to increase in operational risk, banks are facing huge losses. In order to avoid losses, banks need to manage operational risk. This study aims to analyze the impact of operational risk management (ORM) processes, which include identification, assessment, analysis, monitoring and control in the presence of corporate governance (CG) that can also contribute to effective ORM practices.Design/methodology/approachOperational risk management processes are used to manage operational risk along with CG. Primary data are collected through questionnaire from (167) operational risk managers of commercial banks. Multiple linear regressions has been run to analyze the data.FindingsResults indicate significant impact of CG and operational risk identification (ORI), monitoring and control on ORM practices in commercial banks of Pakistan.Originality/valueThe study suggests policy makers to improve the ORM framework by CG. Beside this, in order to lessen operational risk, proper identification, monitoring and control of operational risk could also contribute.

Operational Risk Management: Analysis of Challenges faced by banks in India

Operational risk management is gaining significance in today's dynamic banking environment especially due to the technological disruptions faced by Indian banks today. The objective of this research paper is to analyse the issues faced in management of operational risk. This paper uses a questionnaire-based interview of senior banking professionals to analyse the challenges in operational risk management. It is more complex as compared to other banking risks and in that context an in-depth analysis of the various issues/challenges has been done. Operational risk incidents in banking industry have increased significantly. Such incidents are non-repetitive, so historical trends are not useful here. Availability of data is also one major constraint. The banking system in India should be very proactive in constructing a robust operational risk management framework. Operational risks should be properly managed else it can have serious implications on the reputation of the bank.

MANAGEMENT OF OPERATIONAL RISK COSTS: DEALING WITH CONFLICTS OF INTERESTS AND SENSITIVE CLIENT SITUATIONS IN AUDIT FIRMS

The purpose of this paper is to look into the challenges of management of potential operational risk costs by dealing with conflicts of interests and sensitive client situations in audit firms. Furthermore, the author’s goal is to propose a framework addressing those risks proactively and thus minimizing the potential costs that might arise from such situations. The paper starts with an introduction to the importance of understanding the concepts of conflict of interest situations and sensitive client situations, and why it is often crucial for the leadership and professionals working for audit firms to address the risks arising from them. The author presents a framework, containing policies and procedures for operational risk management with respect to conflicts of interest and sensitive client situations. The proposed framework is tested via a comprehensive survey among a number of audit firms. The results of the survey show that all of the surveyed companies have implemented at least some of the proposed policies and procedures. The results also show that there is a general agreement among the leadership teams of the audit firms that adopting a comprehensive operational risk management framework would benefit the audit firms in the long term minimizing its costs.

A proposed operational risk management framework for small and medium enterprises

Background: The gap between small and medium-sized enterprises (SMEs) and large businesses that perform risk assessment is significant. SMEs continuously face many operational risks and uncertainties in their daily operations, and these risks threaten to reduce productivity, increase costs and reduce profits.Aim: The purpose of this article was to develop an operational risk management framework that SMEs can use to identify and analyse risks in their operations and take corrective actions to mitigate these risks.Setting: Small and medium-sized enterprises in South Africa do not view risk management as a key component of organisational success, despite evidence that businesses that adopt risk management strategies are more likely to survive and grow.Methods: The article is exploratory in nature, and a conceptual analysis approach was used to formulate the framework. This study reviewed relevant literature sources on risk published between 2002 and 2017.Results: The four process steps of risk management were used as a reference point and form the foundation for the operational risk management framework. The categories of operational; marketing; technical and financial risks were identified from a review of available literature on risk management.Conclusion: There is a dearth of research that deals with operational risk management frameworks for SMEs. The expected contribution of this article, therefore, is twofold: firstly, it is envisaged that managers or owners of SMEs could use the proposed framework as a tool to appraise and minimise their operational risks; secondly, it will add to the current body of knowledge on risk appraisal for SMEs.

Modified Independent Component Analysis and Bayesian Network-Based Two-Stage Fault Diagnosis of Process Operations

Statistical fault detection techniques are able to detect fault and diagnose root-cause(s) from the monitored process variables. For complex process operations, it is not feasible to screen all the process variables due to monitoring cost and flooding of alarms. Thus, if a fault is originated from a process variable that is not monitored, conventional statistical techniques are incapable of locating the true root-cause. To relax this limitation, a two-stage fault diagnosis technique is proposed for process operations. In the first-stage, the modified independent component analysis is used for fault detection and to identify the faulty monitored variable. In the second-stage, a Bayesian Network model is constructed considering the process variables and their dependence obtained from the process flow diagram. Evidence is then generated at the network node corresponding to the faulty variable identified in the first-stage. Subsequently, the network is updated and analyzed using deductive and abductive reasoning to identify the true root-cause. To verify the applicability of the proposed technique it is tested on two process models. The results of both case studies have demonstrated the effectiveness of the proposed technique to diagnose the true root-cause that originated from process variables that are not monitored. Once integrated with process loss functions, the proposed technique will serve as an important element of dynamic operational risk management framework.

An Operational Drought Risk Management Framework Based on stream-flow Intelligent Internet control

In this paper, an operational drought risk management framework based on the stream-flow intelligent internet control is proposed. In the proposed framework drought can be predicted, evaluated and mitigated by using a dynamic stream-flow control under the sensors detection. The framework mainly includes four sequential steps: (i) the stream-flow prediction, (ii) the stream-flow deficit index (SDI) analysis, (iii) the drought multiple regions response, and (iv) the stream-flow balance control. In order to instantiate a specific framework management, intelligence methods are utilized in these processes, namely the generalized regression neural network (GRNN) algorithm for the stream-flow prediction and the collaborative particle swarm optimization (CPSO) for the reservoirs water collaborative operation. Finally, a specific case study corresponding to the Fu basin in China is investigated to test the operability and reliability of the proposed drought risk management.

Implementing an Operational Risk Management Framework: Psycho-Social Factors in Tanzania

This qualitative study explored the psychosocial factors that affect the implementation of an operational risk management framework in a financial institution in Tanzania. A purposive sample of 39 participants from three financial institutions was interviewed using semistructured interviews. The data were analysed by means of qualitative content analysis and the open coding procedure of grounded theory was used to identify the highlighted themes. Findings suggest that there is a movement in Tanzania towards acknowledging the value of regulatory operational risk management practices, policies and procedures. Organisations that acquire cross-border interests should take cognisance of the psychosocial factors that affect the implementation of an operational risk management framework in order to address similar challenges.

Risk Management in European and American Corporate Law

In recent years, the emphasis in corporate governance has shifted from board composition, independent directors, separating the position of chairperson and CEO, and establishing board committees to “being in control” and risk management issues. However, the corporate law perspective of internal control and risks management does not match up to the multidisciplinary perspective of these themes. This paper analyses the dichotomy between the US and the EU corporate law approaches to internal control and risk management. Lawmakers from the US, the EU, and the EU member states reacted to the scandals between 2000 and 2003 with provisions requiring public companies to have internal control and risk management systems in order to restore public confidence, but the substance of their responses differed. A regulatory framework is put forward in order to address the steps to be taken in establishing an operational internal control and risk management framework and to address the role of the different parties involved from a corporate law perspective. The above mentioned steps are: (1) initiate and identify, (2) assess and operate, (3) monitor, and (4) report on the systems relating to the companies’ risks and uncertainties, strategy, financial reporting, and operations. The parties legally involved include: (1) senior management, (2) board, (3) audit committee, and (4) auditor. The US and the EU regulatory frameworks indicate not only that their corporate law approaches to internal control and risk management are different, but also that both approaches are incomplete – but not necessarily insufficient – in several areas.

Challenges facing banks in emerging countries to be Basel compliant for operational risk

The New Basel Accord identified various requirements for an effective operational risk management framework. Most central banks and regulators adopted these requirements for their own banking environments. However, there are many challenges facing these banks to ensure the effective incorporation of such a framework. An end-result of establishing an operational risk management framework is to calculate and allocate a realistic capital charge for operational risk. To achieve this, various principles and methodologies must be embedded that will ensure a practical approach to operational risk management. This paper aims to identify certain critical issues and challenges for banks of emerging countries to consider when developing an operational risk management framework in order to comply with the Basel requirements.

Internal audit function role in operational risk management

PurposeThe objective of this paper is to provide a global perspective of the operational risk (OR) management framework from an internal audit viewpoint.Design/methodology/approachThis paper describes the new role of the internal audit function in reviewing the OR framework.FindingsAn efficient OR management framework will improve and reinforce the internal controls of the organization. Internal audit should be alert to the whole process of implementation of the systems for managing OR in entities.Originality/valueThis area has not been analyzed in depth to date. The paper provides a summary guide to audit of OR management frameworks in financial institutions.

Operational risk management with real-time business intelligence

Operational risk is a function of the complexity of the business and the environment that the business operates in. Such complexities increase as the business or the environment become more dynamic, i.e. where change is a permanent feature and a factor to build into the management of the business. The key question that arises is how do businesses respond to such changes today and, if the nature of the business and the environment is becoming more and more dynamic, what actions can businesses take to predict and prepare for change. Viewed in this manner, operational risk becomes very closely related to the operational performance of the enterprise because it can be considered as dealing with changes that have a negative impact on the operational objectives. It is vital for enterprises to understand in real time how they are performing, and where on the spectrum of operational risk they are positioned. To accomplish this, it is essential to have a system for establishing the status of a business at any moment in time in relation to its performance objectives. This is the role of real-time business intelligence (RTBI), without which operational risk management could be out of date, or in some cases out of synchronisation with the business cycle, with serious consequences. This paper discusses the cornerstones of RTBI and demonstrates how these are also essential elements of an effective operational risk management framework.

Operational Risk Management Under Basel II: The Case of the Spanish Financial Services

Operational Risk (OR) is risk of losses resulting from inadequate or failed internal processes, people and systems, and external events. Although it is not new, its control and management have acquired increased importance for financial institutions to remain competitive. A new vision for Operational Risk Management (ORM) is emerging due to new regulatory and management requirements. Basel II, the New Capital Accord finally approved by the Basel Committee on Banking Supervision on June 26, 2004, includes a regulatory capital charge for OR. The accord offers different management-oriented alternative methodologies to quantify capital. The more sophisticated the methodology, the lower the capital charge. This means that OR should be adequately managed in order to assume lower levels of capital. In this context, banks try to develop an effective ORM framework that allows them to identify, assess, monitor, report, control and mitigate their OR. Currently, our research focuses on the definition of the elements that constitute an effective ORM framework in financial institutions. With this end in view, we take as a theoretical and conceptual model the one proposed by the AS/NZS 4360 Australian standard, which was updated in 2004. We apply this model to ORM by reviewing and analysing world-wide best practices, regulations and proposals published by regulators and experts on the subject. To analyse the current situation of the Spanish financial sector and check the adapted model we surveyed the leading institutions in the industry. This paper presents the main results obtained from the questionnaire and shows the Spanish financial system has made great efforts in ORM in recent years. As a result, important progress has been achieved in very little time and it can be said, in general terms, to be on a par with the top leading international systems.