SCOREl Operational risk
An operational risk scorecard approach
Operational risk scorecards have been in the spotlight since the Basel Committee on Banking Supervision’s 2001 paper on op risk treatment under Basel II. In the first of two articles, Ulrich Anders and Michael Sandstedt of Dresdner Bank examine what, specifically, these systems seek to accomplish – and what implementing them entails he analysis of operational risk is a relatively new area, though it is increasingly essential. From market and credit risk it can easily be understood what risk is and how it can be assessed – market risk results from the market portfolio of the company, credit risk results from the credit portfolio of the company. But what do we want to assess
…show more content…
■ Explain from where in the organisation the operational risk comes: the scorecard should reveal what the op risk scores are related to, that is, to which part of the organisation, in connection to which products or business lines, which organisational units and which locations of the company. ■ Present what the causes of operational risk are: only when the causes of op risk are presented in the scorecard do people understand how the level of op risk is determined, why it is at the level at which it is reported in the scorecard and how it can be reduced. ■ Reflect the operational quality: the level of risk in an organisation depends on its operational quality, which includes the quality of the control environment. If the operational quality is low, the organisation will face a higher risk of losses. ■ Focus management attention: the scorecard should not only give a status of the op risk and quality level, but also encourage management to undertake actions to mitigate the risk via quality improvements. Therefore, the scorecard must relate the levels of op risk and quality to each other so management can set priorities for their actions.
It is useful to supplement the information provided by the scorecard with loss data3 resulting from operational risk and key op risk indicators4 to compare op risk assessments, losses and indicators. This task is usually performed by an operational risk management information system.
Risk and quality