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Practice paper

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

Allan D. Grody and Peter J. Hughes
Journal of Risk Management in Financial Institutions, 2 (1), 47-56 (2008)
https://doi.org/10.69554/FXCX1794

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.

Keywords: financial crisis; operational risk; Basel II; data management

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Author's Biography

Allan D. Grody is a founding board member of the Journal of Risk Management in Financial Institutions, founding professor (retired) of New York University’s graduate course in risk management systems, and founding partner (retired) of Coopers & Lybrand’s financial services consulting practice. He began his business career in General Electric’s finance business and later went on to hold increasingly responsible positions in investment management, the securities industry and international banking. He is President of Financial InterGroup Advisors and Financial InterGroup Holdings Ltd, and an advisory board member of ARC Best Practices Ltd.

Peter J. Hughes is a chartered accountant and managing director of the UK risk software and consulting firm, ARC Best Practices Limited. He was formerly a banker with JP Morgan Chase, where he held country and area management positions in Europe and South America encompassing audit, operations, finance and risk management.

Citation

Grody, Allan D. and Hughes, Peter J. (2008, October 1). Financial services in crisis: Operational risk management to the rescue!. In the Journal of Risk Management in Financial Institutions, Volume 2, Issue 1. https://doi.org/10.69554/FXCX1794.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 2 / Issue 1
© Henry Stewart
Publications LLP

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