26 November 2014

Stanley Epstein

Stanley Epstein - Citadel Advantage Ltd

39 | posts 122,875 | views 34 | comments

Operational Risk Management

To share information, ideas and experience relating to all aspects of op-risk management and compliance with Basel II

Lip Service

08 October 2008  |  2990 views  |  0

A key element in the development of any tangible product is the risk analysis that is (or should be) included in the design stage. If I build this object/product as specified, how safe is it going to be? Will it harm my customers? Does it open me up to legal actions? Does it comply with local (and international) consumer and environmental regulations and laws?

The same principal applies to financial products. And have our financial intuitions and financial innovators taken note of this? Not ****** likely!

Nowadays I am heavily involved in training banks and their staff in managing Operational Risk. A key component of our courses in this direction lies in just this area.

The message is clear:

  • To commercial banks - ensure that all new products, activities, processes and systems are subject to adequate assessment procedures regarding operational risk before they are introduced/ implemented. Remember too that using new technology introduces new risks and make sure that these are properly assessed and understood.
  • To central banks- ensure that your oversight and supervisory functions include a rigorous and effective stress testing of new financial products and processes before the product or process is "licensed" or iwhen these fall under regular review.

Of course, in getting these processes adapted as policy, we face a problem that can best be split between banks and central banks as under.

  • At commercial and other banks - It's a contest between profit and extra costs and the profit motive always wins out. Bank executives don't like Jonahs (i.e. a person who carries a "jinx", one who will bring bad luck to any enterprise). Profits get them bonuses. Costs reduce profits. Also the "whiz kid" innovators are like the golden goose and you don't tell them that their eggs are inedible!
  • At central banks - There is an over reliance on academic excellence with, I regret to say, a disdain for practical hands-on operations experience from the coal-face. Some central bankers seem to think that their profession is a "higher calling" which must stand aloof from the sweat and grind of banking-halls and back-office operations.

And there are no sour grapes here either. Personally I am well versed in academia, specifically in banking and monetary policy. Equally so I have had over forty years of hands on operations experience - from hand posting the ledger, to building state of the art RTGS systems plus all the changes that went in between.

I have two messages here.

  • To banks - do your homework before you launch a new product or process. Do an appropriate risk analysis at the design stage and get an outside professional to facilitate it with an appropriate written recommendation to as well as agreement from the local bank board. Spell out the details of the analysis - list the risks and their countermeasures.
  • To central banks - in examining new products and processes use experts in these fields and give adequate consideration to their view and recommendations. In doubt use two or more experts. Consider employing folk with these skills to do the oversight or the risk evaluation.   

Remember that banking, by its nature is based on trust. If you lose the trust of the public you lose everything!

TagsRisk & regulation

Comments: (0)

Comment on this story (membership required)
Log in to receive notifications when someone posts a comment

Latest posts from Stanley

Securitisation and Operational Risk

11 January 2014  |  1397 views  |  0  |  Recommends 0 TagsRisk & regulationInnovation

Operational risk management is NOT a joke

08 January 2014  |  2110 views  |  0  |  Recommends 1 TagsRisk & regulation

Why has SWIFT become so SLOW?

03 May 2012  |  3517 views  |  1  |  Recommends 1 TagsPayments

How do we put banking back into banks?

29 April 2012  |  2106 views  |  1  |  Recommends 0

Cutting costs. They just don't get it.

15 October 2011  |  2682 views  |  1  |  Recommends 1
name

Stanley Epstein

job title

Director

company name

Citadel Advantage Ltd

member since

2008

location

Modiin

Summary profile See full profile »
Stanley is a Director and co-founder of Citadel Advantage Ltd., an international consultancy to t...

Stanley's expertise

What Stanley reads
Stanley writes about

Who is commenting on Stanley's posts