06 January 2005

Ops Risk for Tier II Institutions...

Operational Risk is not just for the big banking institutions any longer. The latest research from Financial Insights indicates that the ramifications of Basel II are impacting four key areas of U.S. financial institutions:

1. Integration difficulties. Although most large institutions have robust risk-management processes, there's much to be done to achieve Basel II compliance. Most risk processes and systems that are currently used grew up within the individual silos of particular business units. The systems aren't integrated and may have different data requirements and formats.

2. New competitive pressures. Even small banks that aren't required to comply with Basel II will face peer pressure, and they may need to comply anyway. If they don't comply, they'll be at a competitive disadvantage.

3. Consistent methodologies for different risks. Regulators require that different risks be treated the same. Institutions using the advanced internal-ratings-based approach for credit and market risk must also use the advanced-measurement approach for operational risk. This poses problems since credit and market risk are well-established practices in most firms, but operational risk is not.

4. Continuing presence of silos.
Silos between business units and systems must be removed for effective risk management. This task is especially daunting for larger institutions, since there are more people and systems involved.

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