A record number of international bankers gathered at RMA's Third Annual Global Operational Risk Forum to discuss the latest advances and challenges in controlling operational risk.
Philadelphia, PA (December 18, 2002)—By controlling operational risk, institutions not only reduce their losses; they gain greater productivity and improve the quality of their service. This was one of the central messages delivered at RMA's Third Annual Global Operational Risk Forum, attended by a record 138 international participants in New York on November 20 and 21.
In her opening address, Suzanne Labarge, vice chairman, RBC Financial Group and also vice chair of RMA, detailed RBC's efforts to implement a thorough operational risk management framework. She also said the discipline of operational risk management has a promising future. "It's safe to predict that organizations, driven either by regulations or their own sad experiences with risk (or both) will focus increasingly on developing their own internal frameworks for managing operational risk," said Labarge. "The discipline, the tools, and the methodology will continue to evolve. There remains a pressing need to develop more transparent, dynamic, and risk-sensitive methods for allocating economic capital for risk."
Subsequent panels, following measurement and management tracks, drilled down into data collection issues and best practices in self-assessment. The RMA Operational Risk Council survey work on the role of the centralized operational risk management unit also was discussed.
Much Remains To Be Done
Despite the industry's efforts to control operational risk, institutions still have much work to do. The 20 largest banks in the U.S. had operational risk losses in 2001 of $2.5 billion, said Eric Rosengren, senior vice president, Federal Reserve Bank of Boston. He told conference attendees that presently only three U.S. banks would be considered to be in the top tier of institutions managing operational risk. A further seven or eight are at the next level, with the balance still lacking a management commitment to use operational risk as a component of economic capital.
Issues surrounding pooled loss event data bases, robust reporting systems, and the modeling of operational risk capital were discussed by panels of senior level bankers. Donald K. Truslow, chief risk officer, Wachovia Corporation, discussed how operational risk ties in to the overall management of risk in the enterprise.
"All institutions are focused on optimizing their use of capital, and smart risk management provides a firm with more flexibility in deciding where it can invest that capital," said Truslow. "In addition, fixed income analysts and rating agencies fully recognize that good operational processes, properly executed, are necessary for quality customer service, which leads to a growing customer base and more stable future cash flows."
Challenges To Instituting an Effective Operational Risk Framework
Participants, including a substantial European contingent, noted the following challenges to instituting an effective operational risk management program in their institutions:
- Understanding the new technology surrounding operational risk management.
- Getting top management to focus on the benefits of the program-improved productivity and quality- as well as on loss reduction.
- Obtaining clean, meaningful, and timely data across business unit and product lines.
One participant cited the example of the self-assessment process in her institution, which resulted in the realization that four different centers were performing the same task according to the same process, without knowing it! The resulting consolidation not only saved money, but improved response time and reduced error rates.
Commitment by Top Management Essential
Ultimately, the success of the operational risk management program resides in the commitment made to it by top management. Benefits of the program are not confined to the largest banks. Zions Bancorp, a $20 billion regional institution based in Salt Lake City, Utah, estimates that its approach to managing operational risk can free up as much as $70 million in regulatory capital.
The Fourth Annual Global Operational Risk Forum will return to Europe in 2003 and will again be organized and hosted by RMA. RMA is the leading professional association to promote effective risk management practices across the entire financial services industry.
Headquartered in Philadelphia, RMA has 3,000 institutional members -- banks of all sizes and nonbank institutions. They are represented in the association by more than 16,000 professionals in the 50 states, Puerto Rico, Canada, and numerous foreign cities, including Hong Kong, Singapore, and London. For more information contact Kathie Beans, RMA senior writer and public relations manager.