A global survey of more than 250 financial institutions and regulators indicates that one-fifth of such organisations still have no formal operational risk programmes in place despite the advancing regulatory compliance schedule associated with the New Basel Capital Accord, or Basel II. The latest draft of Basel II published in June 2004 will once again place regulatory requirements at the top of the agenda. Basel II updates and expands 1988 capital rules for risk management practices.
The survey of medium and large financial institutions, conducted by the Risk Waters Group and SAS, the leader in business intelligence, identified the credit and operational risk priorities for financial services firms. The findings reveal that 19% have not yet identified the best organisational framework for addressing operational risk. These companies cite difficulties in collating clean data and poor awareness among staff as major obstacles, despite average reported losses of $18.8 million per year.
"To meet the basic principles of Basel II, banks need to collect and analyse data for both credit and operational risk. However, the more advanced organisations are not solely driven by regulatory requirements but also by good business sense," said Peyman Mestchian, head of the risk management practice for SAS UK. "The research sought to identify key drivers and demonstrates how the market has moved, with many now seeing both operational and credit risk management as an opportunity rather than red tape."
Regulatory requirements are clearly top of mind for the respondents. When asked to rate the primary factors driving operational risk programs, executives at the financial institutions identified Basel II and related domestic regulation as the most important reason. Meeting regulatory requirements is also identified at the top of the list of key factors influencing credit risk programmes.
Business performance factors rated equally high for driving programs for both credit and operational risk. Respondents estimated that they could reduce economic capital by 10%, on average, as a result of both operational and credit risk programmes.
For example, in a medium- to large-sized bank with 20% of its $10 billion economic capital allocated to operational risk, this translates into a $200 million reduction. Applying a standard 10%, rate for cost of capital, the expected benefit from enhanced operational risk management would be $20 million per year.
"If applied over five years, the business case for a risk management programme using the calculations above becomes very strong indeed. The findings show that organisations are able to quantify the real benefits from effective operational and credit risk programmes and the resulting impact on the bottom line," added Mestchian.
While Basel II is clearly influencing credit and operational risk management programmes, it is the benefits to business - and not regulatory requirements - that are driving the agenda for risk managers.
"It appears that the lack of a clear regulatory framework may be holding some organisations back. The draft of the Basel II accord may spur those organisations into action," noted Mestchian. "However, the most successful will be those that avoid the scattershot approach and view compliance as an opportunity to initiate an integrated and coordinated risk governance programme supported by a robust business case."
For a summary of the survey results, please visit www.sas.com/orsurvey for the operational risk survey results and www.sas.com/crsurvey for the credit risk survey results.
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To help institutions establish a risk management programme, SAS offers SAS Credit Risk Management, an optimal foundation for financial institutions to comply with aspects of Basel II related to credit risk. The SAS solution provides a complete view of an institution's risk position for best credit risk management practices, well beyond the specific Basel II requirements. For more information on SAS Credit Risk Management, please visit (www.sas.com/industry/fsi/credit).
SAS OpRisk Management
SAS recognises the growing need for financial institutions to measure and manage operational risk in a scientific way - not just for regulatory requirements. With powerful data management, analytics and regulatory reporting and disclosure capabilities, SAS OpRisk Management helps institutions optimise capital allocation while mitigating risks. It is comprised of three key components:
* SAS OpRisk Monitor, a Web-based application that collects, manages, tracks and reports information about operational loss events, key risk indicators, risk-assessment maps and control-assessment scores.
* SAS OpRisk VaR, a sophisticated, yet user-friendly analytic VaR (Value at Risk) model that enables users to splice, dice, drill-down, adjust, trend and plot operational loss data at will, following a fully transparent, intuitive and sequential process.
* SAS OpRisk Global Data, a comprehensive database of external loss data that enriches the statistical sample used for modelling, documenting more than 10 000 publicly reported operational loss events of $1 million or more.
These components equip financial institutions with the tools needed to measure and manage operational risk in conformity with industry best practices and Basel II. For more information on SAS OpRisk Management, please visit www.sas.com/industry/fsi/oprisk.
SAS
SAS is the market leader in providing a new generation of business intelligence software and services that create true enterprise intelligence. SAS solutions are used at more than 40 000 sites - including 96 of the top 100 of the 2003 Fortune Global 500 - to develop more profitable relationships with customers and suppliers; to enable better, more accurate and informed decisions; and to drive organisations forward. SAS is the only vendor that completely integrates leading data warehousing, analytics and traditional BI applications to create intelligence from massive amounts of data. For nearly three decades, SAS has been giving customers around the world The Power to Know.
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