It’s Day Three of RiskMinds in Geneva. “Risk Modeling, Measurement and Management in the New World Order” is the topic of the day. We’re in a session on operational risk, “Operational Risk Management Going Forward”, hosted by Joachim Pfeiffer, Commerzbank, and John Whittaker, Barclays.
This is an interactive session, with questions coming from the attendees. Whittaker kicks off the session by noting that many in the conference have said that operational risk is off the agenda as the roots of the crisis lay elsewhere (credit, in particular). Whittaker disagrees, pointing out that impairment at most banks has gone up at most banks, and, and if you look at the root causes of the impairment, certainly credit decisions played a significant part, but so did poor process (collateral not in place) or process not followed.
Whittaker also discussed his concern about regulatory change over the next year. In the coming year, for instance, the “living wills” discussion is of concern, with more hand-offs and hand-ins. He’s also concerned about whether we will have enough people to deal with the extra process.
The rate of change is also a concern. Whittaker notes that organizations will have to be able to quickly modify processes to keep up with regulatory change. The question is whether organizations can keep up.
New product introduction: participants described a process whereby support functions have the ability to veto a new product that can’t easily be supported.
People issues: How do we deal with risk culture? For instance, should we have stage gates for bonus hold back. Tone at the top is really important. People’s bonuses should be calculated based on a risk adjusted P&L. Companies are also beginning to think about earnings quality. Regulators are focusing on a use test: how are companies using risk information.
Operational risk capital number: How does this influence the function? The operational risk component of economic capital is fairly small so it’s difficult to influence policy through the capital calculation discussion. Operational risk could be a must larger component of regulatory capital, however, and operational risk could have more to say in that discussion. Scenarios drive a discussion with the business, potentially enhancing the profitability of the line.
Benefits of AMA: Capital allocation–12.7 for a TSA bank/10.8 for an AMA bank. Huge benefit to putting that capital to work.
BIS range of practices in scenarios: US regulators are not accepting scenarios. Is this a trend? Whittaker thinks no and that US regulators over time will gravitate towards the European point of view. Pfeiffer points out that scenarios are hard to include in a capital model when you need 99.9 confidence.
Loss-based models: Reduce loss without reducing risk . Do we need to move to a causal model? Whittaker believes that everyone will have to have a hybrid-model, including both loss data and scenarios.
Internal control systems: Operational risk can make sure that there’s a single control process throughout the organization so that the person operating the control can spend more time on the control and less time answering questions about whether the control is effective. Also, there should be some consideration given to the way different controls are tested.
Tags: Operational Risk