Operational Risk Management (ORM) is undergoing a transformation and it is widely getting recognised as a major area of risk for financial organisations. Major high street banks in the UK have already implemented BASEL II requirements for Operational Risk (OR) and now they are looking to reap more from their investments. There is a great emphasis on coordinated risk management and organisations have started adopting Enterprise Risk Management (ERM). The main objective for financial institutions in these efforts is to grow beyond compliance requirements and reap business benefits from their investments in OR. One such concept associated with reaping business benefits which is often considered as part of ERM is Risk Appetite. However, there is very little guidance available in the industry for applying the concept of Risk Appetite for OR. This study was conducted as an Action Research to provide a thought leadership in the area of Operational Risk Appetite (ORA). During this study, we initially analysed the regulatory landscape for OR and studied the way it is implemented in a major UK bank. We then conducted several interviews with senior decision makers to understand their views about ORA. Further to that, we conducted an industry-wide survey on the concept. We then supplemented these inputs with the study of existing research and academic articles in this area. The result of this study identifies the unique nature of ORA in comparison to Risk Appetite for credit or market risks. Therefore, we created a more appropriate definition for ORA. We then created an implementation framework for ORA.
John Cyriac’s article on Operational Risk Appetite in November 2008 Oprisk & Compliance
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