Prime loss: A case study in operational risk

Abstract

In march 2008, opes prime, a small stockbroker in melbourne, australia, was placed into administration. this set off a chain of events that caused anz, one of australia’s largest banks, to become involved in a series of messy legal actions. by the end of 2008, losses at the bank had been estimated to exceed a$250m, with litigation still pending. the losses sustained by anz in the opes case constitute an ‘operational risk loss event’ as defined under new banking regulations, basel ii. unlike significant operational risk losses at other banks, such as those sustained by the national australia bank, the losses have not been attributed to so-called ‘rogue traders’. however, like those well-publicised disasters, similar systemic risk management failures were apparent and sowed the seeds for the losses that were eventually precipitated by the demise of opes prime. in a seminal work in decision literature, professor barry turner identified a number of features that are common to the development of ‘organisational disasters’, many of which are apparent in the events leading up to the losses at anz. this paper reviews the anz/opes case using turner’s framework, compares it to the events at other banks, and identifies some lessons for management, risk managers and regulators.