How’s Your Operational Risk Health?
October 16, 2019
Operational Risk Makes a Comeback
In the last few years, banks have significantly strengthened risk controls as industry news emerged of failed controls and resulting losses. Controls in staffing, management, and board oversight have grown in importance and focus.
Focusing on prevention is the best way to address operational risk – including methods to monitor and measure these important risks. Many banks adopted the best practice of assigning accountability for operational risk company-wide by implementing metrics and dashboards across the organization.
A Quick Health Check
Ask yourself these questions to assess your operational risk measurement effectiveness:
Do you have an overall sense of how your operational risk program is working?
- Do you get robust aggregate measures that give you and your board an enterprise view of operational risk?
- Do your key stakeholders have operational risk measures for which they are clearly accountable?
- Does the program stand up to regulatory scrutiny?
- Are emerging risks well understood and addressed?
Are your operational risk metrics:
- Reliable – developed from solid, verifiable and accurate data?
- Relevant – work for your business and measure risk well?
- Quantitative – assess the state of risk in calculable manner?
- Straightforward – easy to understand and explain, both internally and externally?
Results Mediocre? Best Practices Can Get You to Excellent
Based on years of experience working through clients’ operational risk challenges, here’s a 4-step best practice methodology to help you get started. It all starts with reporting. Our structured, efficient and effective approach builds consensus and accountability, with appropriately scaled impact on existing resources.
Four-Step Approach to Optimize Operational Risk Reporting
Step 1: Identify overall organizational goals and eliminate unwanted, costly missteps and false starts.
Actions: Gather information from key stakeholders on the organizations’ operational risk priorities based on loss profiles, and the effectiveness of operational risk measurement. What is the current state? What is the target future state? What tangible and material accountabilities currently exist?
Step 2: Assess inventory of current metrics to identify those that don’t add value, so the focus remains on what’s important.
Actions: Review your existing inventory of operational risk metrics and evaluate the benefits and challenges of each metric. Identify gaps or duplication (or high correlation) within the existing operational risk metric infrastructure. This involves a rigorous assessment, detailing each metric, its definition, benefits and challenges to assess suitability
Step 3: Evaluate assessment findings for comprehension and socialize for input and consensus building.
Actions: Put assessment findings and critical metrics into priority order. Ask operational risk SMEs to evaluate the metrics, and conclude they successfully measure performance and identify issues. Share assessment results and data prioritization with Operational Risk leaders and Board of Directors.
Step 4: Implement new reporting to identify and address previous deficiencies in managing and monitoring your operational risk health.
Actions: Successfully sunset old metrics that do not support established operational risk priorities. Design and test new metrics, including quality of the data feeding the metric, and the formats of how they are shown. Modify operational risk health dashboard design and leadership scorecards with corresponding risk tolerances to reflect all changes and evaluate its effectiveness. Roll out organizationally using change management processes.
Follow the Steps for a Well-Managed Operational Risk Framework
Following the four-step plan and acting on findings will result in rapidly simplified and enhanced performance measures against key priorities within your operational risk framework. You will ensure that operational risk is well-measured and managed at all organizational levels. Ultimately, these steps will drive reduced losses associated with operational risk.
With a solid operational risk measurement program in place, you should have:
- Board Reporting that informs the Board about the state of operational risk, actions needed and solutions to minimize risk
- Reporting that includes an assessment of overall operational risk for the enterprise, both quantitatively and qualitatively
- Understanding of operational risk loss drivers and sources, and associated mitigating actions
Go beyond the checkup to improve your operational risk health
Bridgeforce partners with financial institutions to help them identify and attain precise metrics for reporting and monitoring the business environment. This helps build understanding, enforces controls and reduces operational risk losses. If you would like to discuss any of our services or how we might be able to support your health check, preventative measures or mitigation, please contact us.