The Basel II accord is very clear on the need for banks to actively manage their operational risk. However an over-emphasis is being placed on the "loss data" aspect, to the pont where sight is being lost of what the spirit of operational risk mitigation is all about.
The Basel II Capital Adequacy requirements have been introduced to encourage banks to improve their management of Credit, Market and Operational Risks. Under the new accord comes a risk based capital requirement specifically for Operational Risk. While capital is important it is only one defense against risk. It is also unlikely that it will be the preferred solution.
An increase in capital will not in itself reduce risk, only management action can achieve this. The control of Operational Risk fundamentally lies with good management. This involves a persistent process of vigilance and continued improvement. Operational Risk Management is a value adding activity that impacts, either directly or indirectly on a bank’s bottom line performance. It therefore should be a key consideration for any bank.
However despite this, the advertising material put out by many technology suppliers on the question of Basel II Operational Risk compliance carries a single message – that Operational Risk Compliance is all about the bean counting, or to put it into their jargon, “DATA MINING”. Not a word is said about the real message flowing from Basle II; – MANAGE the risk and not, repeat NOT only measure it. Undeniably Basel II is more than an exercise in capital allocation and loss data gathering.
Consider the following assortment of claims being made for some of the Basel II software now on offer. It will:
These folk have missed the point completely. There is also an operational risk management process waiting to be implemented and no one is saying anything about it.
And don’t only take my word for it! The international Rating Agencies have made it abundantly clear where they stand on Operational Risk and how this aspect is going to affect future bank ratings. The following quotations illustrate the point.
“A quantitative approach to operational risk management is not the ultimate solution. … critically important is the implementation of an effective qualitative process of identifying, measuring, managing and controlling operational risk.”
“Since operational risk will affect credit ratings, share prices and organizational reputation, analysts will increasingly include it in their assessment of the management, their strategy and the expected long-term performance of the business.”
Trying to summarize all the risks into a single number or a range of numbers and then trying to manage this down is the first impulse of many banks and they see technology as being the ideal solution. They are creating a false sense of security by turning a blind eye to the real issue – Managing Risk.
Mobile Manners
The mobile phone has become ubiquitous. It is the one hi-tech device that has become the universal calling card for humankind. Yet despite the privilege and the benefits that this instrument bestows it has turned many folk into rude bores bereft of any manners in their slavish obedience to this twenty-first century icon.
Is the Financial Crisis Really Over?
To really fix the financial and banking system governments and regulators need to get to the core of the problems that led to the 2007-9 financial crisis. The evidence so far indicates that the current approach has failed and that throwing money at banks is not a part of the solution. Unless the authorities can get the “fix” right we are facing ongoing crisis as banks revert to their old ways with little regard for anyone but themselves.
Mobile Payments & Remittances – Dangers Ahead
The use of the mobile phone for the transfer of workers’ remittances and for small payments holds much promise, especially in Africa. However two problematic issues threaten the mobile revolution. These are the attitude of the banks to their prospective clients and the attitude of bank regulators to non-bank participants.
