Managing Operational Risk: Practical Strategies to Identify by Douglas Robertson

By Douglas Robertson

Operational possibility is the danger of loss from insufficient or failed inner methods, humans, and structures or from exterior occasions. This publication explores the different sorts of operational probability that threaten monetary associations, and makes a speciality of useful due-diligence methodologies that may be used to spot those hazards ahead of it's too overdue.

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As Marshall points out, efforts to mitigate operational risks will be more productive if those mitigation efforts reduce the likelihood of highfrequency events or the severity of high-impact events. For financial institutions, bad lending will almost always result in a high-impact event, and no bad lending event makes this clearer than the subprime lending crisis. The death of Barings Bank in 1991 provides a good example of how we had come to view a typical catastrophic operational 47 48 Managing Operational Risk risk event prior to the subprime crisis.

The Comptroller’s Handbook sets three fundamental objectives for the audit function: 1. Effectively test and monitor internal controls, 2. Ensure the reliability of the bank’s financial statements and reporting, and 3. Satisfy statutory, regulatory, and supervisory requirements. Furthermore, the Handbook tasks the bank’s board of directors with ensuring that the bank’s audit program identifies the following potential problems: 1. 2. 3. 4. 5. 14 With this focus on activities such as transactions, reporting, and policies and procedures, many operational risks readily fall under the purview of these audit program expectations.

Amplifying the problem, CDOs and CDSs allowed other investors to speculate on subprime mortgage-backed securities. Linkages through securitization Securitization was the linchpin that linked institutions and investors in a network that spread subprime problems throughout the financial system. News coverage about bankruptcy filings of subprime mortgage lenders generally identified the bankrupt companies’ major creditors, and many of these creditors soon made their own way into the headlines.

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