Best practices in Operational Risk Management

Businesses have become global and more organized in the present financial world together with the sophisticated of financial technology. Advancing technology has also invited complexity in the activities of the financial institutions and the level of risk across a firm.

Establishing best practices in Operational Risk Management includes the risks other than credit, interest rate and market risk can be substantial.

Some of the novel risks that have emerged for the financial institutions include:

Advanced technology:

Technology has to be applied to reduce the human errors arising from manual processing. However, too much dependency on technology sometimes may give rise to the system failure errors.

Data Security:

With the evolving cloud-based businesses (e-commerce), potential risks like internal and external fraud and system security issues have come up.

Proper Maintenance and Backup:

The financial institutions have evolved a leader as service providers. This calls for greater maintenance of high-grade internal controls and back-up systems.

According to the new Basel Capital Accord that was proposed in 2001 has stated Operational Risks as a distinct class of risk that of course, differs from credit risk and market risks. It is termed to be a significant contributor to any financial institution's risk profile. The regulation also suggested various approaches to assess the operational risk exposure for a financial institution. These approaches have however evolved over time and today the level of complexity under various approaches varies widely.

Below listed are some of the best possible practices that can be applied by any organization:

Organizations must have a thorough understanding of:

·         The place of Operational Risk Management (ORM) in the context of risk management.

·         The proper knowledge on the significant difference between Operational Risk Management and Operational Risk Measurement.

·         Best practices for the ORM.

·         Significance of operational risk in Governance, Risk and Compliance and Enterprise Risk Management frameworks.

·         The procedures and policies required to support ORM.

Often the ORM function in any financial institution forms a part of central risk function. Any organization can achieve the best possible protection against the negative impact of the potential risks and can achieve best growth opportunities with ORM.