18 September 2006

A Convergent Framework of Risk Management...

Operational Risk Management has many facets in the eyes of the modern Chief Risk Officer (CRO). Last month, the High-level Principles for Business Continuity were summarized at the Basel Committee on Banking Supervision.

Recent acts of terrorism, outbreaks of Severe Acute Respiratory Syndrome and various widespread natural disasters have underlined the substantial risk of major operational disruptions to the financial system. Financial authorities and financial industry participants have a shared interest in promoting the resilience of the financial system to such disruptions.

To that end, financial authorities have been working closely with financial industry participants to establish a consensus as to what constitutes acceptable standards for business continuity. Much of this work to date has been focussed at the national level. At the international level, while there have been several regulatory and private sector initiatives on the business continuity front there has not been a concerted effort to draw together the lessons learned from major events and translate them into a set of business continuity principles that is relevant across national boundaries and financial sectors (ie banking, securities, and insurance). Furthermore, consistent with their focus on preserving the functionality of the financial system as a whole, financial authorities undertaking these initiatives have tended to give priority to critical market participants. The lessons learned from past experience, however, are applicable to a broader audience.

This paper represents an effort to address these gaps. It is intended to support international standard setting organisations and national financial authorities by providing a broad framework within which more detailed business continuity arrangements might be developed that are more closely tailored to unique sectoral and local circumstances. The principles also provide a consistent context for those arrangements and thereby promote a common base level of resilience across national boundaries.

Since 2004, The Tower Group has been shouting the need for banks to automate now in the midst of the Basel II momentum. While business performance has converged with Basel II, the key understanding needed is what do Business Performance & Basel II have to do with my survivability as a money center bank?

Basel II introduces a convergent framework of risk management and controls that will encourage banks to invest wisely in IT and improve the efficiency of their business operations. Banks that adopt effective enterprise risk management platforms will reap business benefits that go well beyond regulatory compliance.

Knowledge Management is coming to banking in a way that the bean counters never imagined. With the focus on Operational Risks, the only way to be able to correlate new threats with the current asset base is through automation.

The industry is now at the implementation phase of Basel II. Few banks have the perspective and resources to experiment and establish their own enterprise risk management models that include this new field of operational risk. Notwithstanding their attention to business continuity and reputational risk matters, most banks have still to inscribe operational risk procedures in the broader picture of business management and operational efficiency. Not only may banks improve their operational efficiency by streamlining business processes, but they also can tap important benefits in operational resilience, responsiveness and flexibility to innovate. By adopting automation models for integrated business and risk management, proactive banks may derive significant returns from a concerted enterprise approach.

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