Many wholesale and investment banks are hopelessly confused on how to reduce their exposure to operational risk, according to new research from TCA Consulting.
The research, based on an independent survey, indicates that banks are unsure about the definition of operational risk, who should take internal ownership of it and how to tackle the challenges faced once they are clearly identified. The research also reveals that many wholesale banks are watching and waiting for the Basel Committee to conclude their deliberations and issue clear guidelines relating to operational risk, before dealing with the problem head-on.
Andrew Grant, managing consultant and head of TCA Consulting's risk practice comments: "The findings demonstrate that many banks are nowhere near having a concerted strategy in place to tackle the pervasive threat of operational risk. Almost half (forty-six per cent) of respondents could not even confirm that their bank maintained a database recording losses accrued through operational risk.
In more detail, forty per cent of risk managers from banks which have not allocated capital to assessing and controlling operational risk said that this was because they were 'waiting for Basel'. Several banks cited the uncertain composition of the final accord itself as a reason why they had not invested in methodologies for identifying and managing operational risk.
Moreover, few banks are treating operational risk as a discipline in its own right - fewer than thirty per cent of institutions polled have a specific head of operational risk. Less than half of the heads of business polled were able to give even basic details of any of the assessment methods used by their bank to deal with operational risk.
Sixty per cent of respondents who commented on the Internet said that it increased the threat of operational risk. However, several pointed out that the Internet did have the beneficial effect of removing the possibility of errors derived from re-keying data.
Andrew Grant concludes: "This atmosphere of confusion is potentially damaging for the industry. Many of the highest operationally risk prone areas, such as settlement, are extremely visible to customers. The reputational benefits of getting a handle on operational risk now, rather than waiting until 2005 or beyond, are clearly apparent."