Financial services in crisis: Operational risk management to the rescue!

Abstract

In today’s financial crisis, the capital reserves held by banks have become the measure by which an organisation counts down to failure, rather than the system to proactively prevent it. Indeed, the bankruptcies and near-death experience of a number of financial institutions provide yet further evidence of risk management controls gone awry. The question then has to be asked, what is it that offers a financial institution its greatest protection against failure if it is not capital? Quite simply, it is the risk culture embedded in its people and processes. At the core of any risk culture are the incentives for individual reward that balance risk and return with short-term self-interest and long-term stakeholder goals. Furthermore, it is the embedded early warning systems that highlight growing exposures to risk. Here, the greatest hope for preventing such crisis in the future lies in the final piece of Basel II — the yet to be implemented operational risk framework — the first-ever truly global regulation intended to foster a risk-adjusted performance culture.