Managing risks is now an essential bank practice

Ki Nan Tsui

The Nation

Since 1980, financial institutions have incurred operational-risk losses of about US$200 billion (Bt6.33 trillion), said John Lee, head of regional financial-risk management for the Asia-Pacific at KPMG.

While risk managers and financial professionals place more emphasis on market and credit risk, most losses in financial institutions are caused by operational risk. And their share of total risk losses is increasing, expected to make up at least 40 per cent in the near future, said Lee.

The recent $1.5-billion loss resulting from poor monitoring of Jerome Kerviel's trading activities at Societe Generale is only part of a string of losses resulting from poor operational-risk management (ORM), which encompasses Sumitomo's $1.8-billion loss from fraud and forgery to UK Prudential's $1-billion loss from a sales-practice fiasco. And of course, there is infamous rogue trader Nick Leeson, who brought down Barings Bank.

Whereas executives can blame the markets or even bad weather, there is no hiding in an operational mess. With dirty linen taken out to be washed and hung up, the reputations of companies are at stake. This makes it all the more costly.

Lee noted that rating agencies have started assessing the ORM capabilities of financial institutions. A good ORM can push a bank's rating up a notch.

The new Basel II, which starts at the end of the year, will also guide financial institutions towards a path of security through better ORM, said Bank of Thailand governor Tarisa Watanagase.

There is an inherent benefit to ORM. It can also streamline a company's operation. For instance, when it comes to purchasing insurance policies for the company, Lee asks who is better positioned to do this than in-house risk managers.

Lee believes all of these reasons and more should place a structured and holistic ORM framework on the agenda of all financial institutions.