Operational Riskdata eXchange to help organisations avoid risk

Risk is a major concern for all financial businesses, large or small. For larger organisations a major focus is currently on operational risk - the area least easy to measure or predict, and one of the major legs of Basel II.

Basel II (New Basel Capital Accord) is a set of broad policy guidelines that each country's supervisors can use to determine the supervisory policies they apply. The new framework is intended to align capital adequacy assessment more closely with the key elements of banking risks, and to provide incentives for banks to enhance their risk measurement and management capabilities.

A new forum has been established in Switzerland to help organisations deal with operational risk. Known as the Operational Riskdata eXchange Association (ORX), its purpose is to act as a forum for the exchange of operational risk-related loss information among its members. It aims to achieve this in a standardised, anonymous and quality assured way.

"The organisation has created a loss event database to which members anonymously submit their losses," explains Kerry Evans, general manager: Financial Services of SAS Institute SA, leaders in business intelligence. "Any event that negatively affects the operation of a financial services company is submitted to the database. This helps ORX members assess the probability of a similar loss happening, and take steps to prevent it."

ORX defines an operational risk event as "an incident leading to the actual outcome(s) of a business process to differ from the expected outcome(s) due to inadequate or failed processes, people and systems, or due to external facts or circumstances".

An operational risk loss is defined as "a negative impact on the earnings or equity value of the firm due to an operational risk event". In SA, operational risk events could range from the HIV/AIDS pandemic to an irate client throwing snakes into a bank branch.

"Financial institutions can extract information from the ORX database and use this to model their own risk," says Evans.

According to Evans, one of the major problems with the Basel II operational risk regulations is that companies have not captured these material loss events in the past. It is therefore exceedingly difficult for them to start assessing their own operational risk.

"By pooling incidents of loss - which are not that frequent - financial companies can draw on others' experience," says Evans.

ORX uses SAS's leading business intelligence technology for its database and business intelligence requirements.