Operational Risk Management in Financial Institutions: An Overview

Abstract

After the 2008 financial crisis, many attributed the crisis due to the inability of financial risks to manage operational risks. The period during and after 2008 was critical in providing insight on how vital operational risk management is essential to financial institutions and how best these risks can be managed. The study begins with an overview of the concept of risk and BASEL I, II and III and how they apply to financial institutions. Further, the paper discusses the growing need for operational risk management in the context of financial institutions taking into considerations various models and approaches used in the management of financial risks. Moreover, several pieces of literature discussed operational risks in the financial institutions. The paper also looks at the various methods of operational risk identification and management before concluding that for better management of operational risks in banks, there is the need to comply with both the national and international regulations and procedures.

Analysis of Impacts of Operational Risk Management Practices on Banks’ Financial Performance: Study of Selected Commercial Banks in Nigeria

“…Prior to this period, operational risk was neglected and viewed as a mere residual risk, that is, part of other risks type that falls outside the purview of market risks and credit risks (Siminyu;Clive & Musiega, 2017;Power, 2003). Following these events, Basel II recognized operational risk as a separate risk class different from credit and market risk (Abdullah, Farouk & Bassam, 2018). The hype by regulators and the eventual inclusion of Operational Risk in Basel II; as one of the risk types attracting regulatory capital, drove the wide acceptance and institutionalization of operational risks (ORX, 2018).…”

The analysis of drivers of operational risks in Nigerian commercial banks

“…The study emphasized the need to involve the operators in identifying and managing their risks and have experienced risk officers with the right skills for effective identification of potential operational risks in the face of increasing rapid changes in the environmental, business and technological space. Abdullah, Farouk and Bassam (2018) asserted that people risk constitute a major source of operational risk which may manifest in form of high workload for employees, inadequately trained employees and high staff attrition without corresponding replacements. However, according to BCBS (2011), internal processes, people, systems or external events are highlighted as the main drivers of operational risks in financial institutions.…”

“…Many of these staff are also overworked due to the high number of mundane transaction requests treated daily. More so, due to the pressure of work, many of these staff are not exposed to sufficient trainings which also inadvertently increases the error rates (Abdullah, Farouk & Bassam, 2018;Knezevic, 2013). Increase in staff workload can also predispose them to higher error rates which translates to higher operational losses and vice versa.…”

“…Internal process and procedure is the most challenging driver of risk in banks mainly because process risk is intricately linked to people risks and often difficult to distinctively separate (Abdullah, Farouk & Bassam, 2018;Knezevic, 2013). It is usually very difficult to separate the risk caused by failed internal processes from those caused by people.…”

“…These failures will often manifest in form of omissions and work inefficiencies. Also, the design of some processes adopted by banks may have some loopholes which may expose the bank to risk of process manipulation by unscrupulous staff (Abdullah, Farouk & Bassam, 2018). Unlike other drivers of operational risks, loopholes in internal processes are often difficult to detect and usually require a strong commitment and right disposition of management to identify them and eventually resolve them (Knezevic, 2013).…”