OPERATION RISK

Operation Risk

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Operation Risk

Introduction

Operational risk is common in every area of business. Irrespective of personal or business fields, implication of operational risk can be seen clearly.

The connected world in which we live has rung in a new era of prosperity, productivity, and opportunity. Yet along with those rewards, we are periodically reminded of the risks that accompany them, lurking just below the surface of such a promising exterior.

Operational risks are those of our interconnected world becoming disrupted on a large scale, or locally in our workplaces or neighborhoods through acts of man, or of nature. They involve our global systems becoming disrupted through malicious or careless omission. They are the risks that unbridled acts of co-workers cause massive losses or embarrassment to our companies. We might see competitive forces run amok resulting in disputes between Company and customer, employees or regulators, or in misdeeds by management or staff alike. Furthermore, we may find our companies become embroiled in landmark legal judgments and settlements, fraudulent practices in accounting, inappropriate procedures in sales, terrorist activities, corporate sabotage, regulatory violations, or damages resulting from earthquake or windstorm. (Jordan 2005, 196)

These are risks that lie in wait, quietly hidden for the most part. However, they are especially dangerous because the errors, omissions, and control failures that underpin them are most often viewed and experienced as routine nuisances— the larger versions of these losses occur far less frequently. This infrequency is a good thing, of course. Moreover, it is also the very feature that makes them all more dangerous because they are too often ignored like being insignificant, improbable, or uninteresting. Furthermore, therein lies the challenge to managing them. The challenge becomes one of balance: maintaining just enough focus to control them, without becoming so obsessed and overbearing that the operational risk management effort becomes an unreasonable drag on productivity. (Allen 2004, 171)

Still, there is no complete consensus on a definition of operational risk. With the ongoing discussions in the financial services industry and series of releases from the Basel Committee on Banking Supervision, and its Risk Management Group in Basel, Switzerland, however, one is emerging. With the exception of some fringe areas of debate, operational risk has generally means the risk of loss from insufficient or unsuccessful organizational practices, human resource, or from outside happenings. The fundamental descriptions of those risks are anything but new. Whether a consensus definition emerges from this version, or some variation of it, the discipline is probably very close to reaching common ground on a definition. The final version, however, must reach beyond that overview description to clarify the details of risk classes and subclasses.

It is no exaggeration to say that people have felt the effects of operational risk since the beginning of time. Maslow's hierarchy of needs provides an interesting backdrop for the history of operational risk priorities. For instance, he placed food and shelter and, essentially, survival in the first step of the ladder. Basic physical risks of loss were among the first to ...