Difficulties in collating clean data and poor awareness among staff are the major obstacles to effective operational risk management, according to a recent survey by Risk Waters Group and SAS, the leader in business intelligence.
The survey of more than 250 financial institutions and regulators identified managing data quality as the number one issue, with respondents reporting difficulties in collating sufficient volumes of historical data and in ensuring reliable data. The second most pressing issue was the poor overall awareness of operational risk issues by staff, due largely to lack of clear education programmes in operational risk, lack of communication and limited knowledge sharing.
Regulations such as Basel II place a growing emphasis on operational risk management within financial institutions. Banks are compelled to gather data that they do not currently collect; they are also required to bring that data together from a host of disparate systems into one pool for analysis.
"The two key barriers to financial institutions achieving success relate to basic issues such as data quality and awareness among staff. A basic lack of awareness among staff often results in insufficient data being collected," said Peyman Mestchian, head of the risk management practice, SAS UK.
"Employees may not always report losses and therefore impact the accuracy of data available. They need to be educated to a level where they are providing consistent information therefore improving data accuracy. Organisations can use the most sophisticated analytical tools in the world, however, if they are not working with comprehensive, real-world data they will miss the real dangers. Inconsistent and inaccurate data will only provide problems and create disagreements. These issues need to be addressed as a matter of some urgency, particularly with latest draft of the New Basel Accord (Basel II) published in June," continued Mestchian.
To comply with new regulations, organisations require systems that are both scalable and flexible. Systems need to combine qualitative and quantitative data and be able to link external data with internal data. Yet for many having the correct systems in place is still a major challenge.
Survey respondents ranked IT systems failure as the main source of operational risk. An area of growing importance was identified as customer relationship risk, with regulatory and compliance issues (including taxation) third.
"Definitional issues aside, in surveys like this, companies often report what they can most easily identify and quantify as a risk. One could argue that the loss of key personnel in a bank is a much greater risk than IT systems failures, which are already subjected to all sorts of controls such as disaster recovery and business continuity planning. However, people-related risks are harder to identify and quantify so they are not as visible," added Mestchian.
While the survey reveals progress over the past 12 months, there is still a lot to do. Operational risk is less well defined and potentially a greater challenge than credit and market risk. Incredibly, 19% of global respondents do not even have a programme in place. This can be attributed to an organisation's size; institutions with an annual turnover of less than $100 million are most likely not to have a programme.
Respondents quantifying the economic returns of a successful operational risk programme revealed expected savings running into tens of millions of dollars annually for large financial institutions. On average respondents expect 17% reduction in loss.
"Financial institutions now recognise that a successful operational risk management programme will deliver clear economic rewards and business benefits. Benefits identified include increased revenue and better business performance. Improving performance is top of the list of main benefits for successful operational risk management; respondents placed this ahead of reduction in operational losses and protection against loss of reputation," said Mestchian.
"The survey suggests that while organisations continue to spend more on operational risk management, the rate of increase has slowed considerably. The bottom line is that organisations need to focus on their data, processes and people, and not get too hung up on regulatory details," concluded Mestchian.
For a summary of the survey results, please visit www.sas.com/orsurvey.
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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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