1 The standard Basel Committee on Banking Supervision definition of operational (or nonfinancial) risk is “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.
Orx taxonomy series#
While banks have been aware of risks associated with operations or employee activities for a long while, the Basel Committee on Banking Supervision (BCBS), in a series of papers published between 19, elevated operational risk to a distinct and controllable risk category requiring its own tools and organization. Operational risk is a relatively young field: it became an independent discipline only in the past 20 years. The cases for change are in fact diverse and compelling, but transformations can present formidable challenges for functions and their institutions. Using advanced-analytics models to monitor behavioral patterns among 20,000 employees, the bank identified unwanted anomalies before they became serious problems. A North American bank assessed conduct-risk exposures in its retail sales force. Using machine learning to identify crucial data flaws, the bank made necessary data-quality improvements and thereby quickly eliminated an estimated 35,000 investigative hours. For example, one global bank tackled unacceptable false-positive rates in anti–money laundering (AML) detection-which were as high as 96 percent. Already, efforts to address the new challenges are bringing measurable bottom-line impact. The advantages for financial-services firms that manage to do this are significant. Within reach is more targeted risk management, undertaken with greater efficiency, and truly integrated with business decision making. The adoption of new technologies and the use of new data can improve operational-risk management itself. Legacy processes and controls have to be updated to begin with, but banks can also look upon the imperative to change as an improvement opportunity. Operational risk must keep up with this dynamic environment, including the evolving risk landscape. Breakthrough technology, increased data availability, and new business models and value chains are transforming the ways banks serve customers, interact with third parties, and operate internally. New forces are creating new demands for operational-risk management in financial services.
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