13 August 2004

Survey identifies main stumbling blocks to successful operational risk management

Survey identifies main stumbling blocks to successful operational risk management:

Difficulties in collating clean data and poor awareness among staff are the major obstacles to effective operational risk management, according to a recent survey by Risk Waters Group and SAS.

The survey of more than 250 financial institutions and regulators identified managing data quality as the number one issue, with respondents reporting difficulties in collating sufficient volumes of historical data and in ensuring reliable data. The second most pressing issue was the poor overall awareness of operational risk issues by staff, due largely to lack of clear education programs in operational risk, lack of communication and limited knowledge sharing.

Regulations such as Basel II place a growing emphasis on operational risk management within financial institutions. Banks are compelled to gather data that they do not currently collect; they are also required to bring that data together from a host of disparate systems into one pool for analysis.

'The two key barriers to financial institutions achieving success relate to basic issues such as data quality and awareness amongst staff. A basic lack of awareness amongst staff often results in insufficient data being collected,' said Peyman Mestchian, head of the risk management practice, SAS UK.

'Employees may not always report losses and therefore impact the accuracy of data available. They need to be educated to a level where they are providing consistent information therefore improving data accuracy. Organisations can use the most sophisticated analytical tools in the world, however if they are not working with comprehensive, real-world data they will miss the real dangers. Inconsistent and inaccurate data will only provide problems and create disagreements. These issues need to be addressed as a matter of some urgency, particularly with latest draft of the New Basel Accord (Basel II) published in June,' continued Mestchian.

To comply with new regulations, organisations require systems that are both scalable and flexible. Systems need to combine qualitative and quantitative data and be able to link external data with internal data. Yet for many having the correct systems in place is still a major challenge.

Survey respondents ranked IT systems failure as the main source of operational risk. An area of growing importance was identified as customer relationship risk, with regulatory and compliance issues (including taxation) third."

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