Operational Risk Essay

999 Words 4 Pages
There are several definitions of Operational Risk which follow a similar theme.
For example "Operational Risk is the risk that deficiencies in information systems or internal controls will result in unexpected loss. The risk is associated with human error, systems failure and inadequate procedures or controls" (Basel, 2000) "Operational Risk is the risk of direct or indirect losses resulting from inadequate or failed processes, people, and system or from external events" (Basel, 2001)
A well-known example of failures in Operational Risk occurred in 2012 when Ulster Bank’s IT systems failed which caused severe delays in the lodging of its customer’s salary payments. The resulting fallout led to delays in these customers being able to pay bills
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Strategy Risks: It could be argued that UB voluntarily accepted the risk of using outdated IT systems in order to improve profit margins. iii. External Risks:
Ulster Bank outsourced large amounts of their IT operations to a third party which added to the length of time it took to restore systems. The external provider while retained by UB was outside the control of the bank & was a serious external risk. While outsourcing has been proven to be more cost efficient it is still important to keep vital IT systems within direct control of the bank.

Many companies continue to overlook various threats/risks. Reasons for this are varied from individual over confidence, narrow assessment of the range of outcomes i.e. not foreseeing the dangers ahead, favouring information that supports our position & suppressing information that contradicts it (confirmation bias) and then compounding this by allocating even more resources to try and turn it around. Additionally organizational biases such as when teams proceed with a course of action that has gathered so much support it becomes difficult to change position, have a tendency to suppress objections (Groupthink). These biases go some way to explaining why companies tend to overlook or misread threats. Normalization of deviance i.e. toleration of minor failures or defects and ignoring early warning signals further increases the likelihood of a risk event
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(EBA, 2015)
The primary objective of Market Risk Management, a part of our independent Risk function, is to ensure that our business units optimize the risk-reward relationship and do not expose us to unacceptable losses outside of our risk appetite. (Deutsche Bank, 2012)
Irish Banks took on considerable Market Risk during the Celtic tiger era when there was significant pressure from competition to grow their mortgage lending books and market share. There was strong competition with a number of foreign owned banks entering the market due to the high returns available from property investment.
Bank of Scotland Ireland’s (BOSI) entry into the Irish market and its risk management framework is a prime example of a failure to manage market risk. A recent report found that there was insufficient involvement of FSA senior management in the day-to-day supervision of the bank prior to the financial crisis to help influence the banks senior management or to sense check and verify the commitments of the firm to follow through on plans; (FSA, 2011)


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