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Risk Management

11:33 AM
Cristina McEachern
Cristina McEachern
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Operational Risk: Qualitative versus Quantitative

New research says most investment in operational risk will focus on processes, not necessarily technology.

Operational risk has become more and more of an everyday word for financial-services firms over the past two years as Basel II and high-profile losses such as rogue trading have made headlines. And as firms move forward with operational risk preparation, most are taking more of a qualitative approach versus the more traditional quantitative approaches for credit and market risk. In other words, firms are concentrating more on business processes and workflow rather than operational-risk-specific technology according to new research by Financial Insights, the newly named company formed by the combination of IDC's Financial Services Advisory Business and Meridien Research, entitled, "Operational Risk Solutions: Has Their Time (Finally) Come?"

"The most active institutions are pursuing a qualitative approach and taking more iterative steps to improve overall operational processes," says Debbie Williams, group vice president, corporate banking and capital markets at IDC/Meridien. "That's not to say they aren't looking at what they need to be compliant with BIS II when it comes into place, but they are looking for management tools to improve operational risk overall without being too reliant on numbers to help them do that."

Williams says that in terms of BIS II initiatives, many firms are working to develop a core loss database internally to gather loss information and to use as a basis for loss probabilities of estimates of loss. "If you can't identify losses as they occur, you can't manage them," says Williams. She adds that these internal-loss databases, which are already being built by firms, may prove more useful than an industry utility or database of publicly available loss data.

"The issue with publicly available data is applicability," says Williams. "You can look at the loss event, but you don't know whether it's really relevant to your business unit or geography without some information on that organization's business practices. You don't know if it's something you might be exposed to or not."

She also says that moving forward firms will be looking more into how operational risk is managed and who is responsible for managing it within business lines. In many cases there might be an enterprise-wide focused individual who collects the loss data, sets the standards, etc across many business units, adds Williams.

But in general, Williams says, "We're projecting very little dedicated technology to operational risk overall, it's so much a part of each individual process in the business units that the vast majority of spending will be done by each unit." She points to spending on the internal databases as well as analytical tools, but not to the scale being spent on technology in other risk areas.

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