Operational Risk Metrics: Seeing Is Believing

GARP.org article by Peter Hughes

Tests conducted by researchers at the Durham University Business School, in collaboration with the Risk Accounting Standards Board (RASB) found that exposures to the operational risks of U.S. banks may have increased by as much as 60% during the eight years leading up to the financial crisis of 2007-’08.

Academics are putting the risk accounting method through its paces. Initial tests of the method involved restating publicly available quarterly submissions of U.S. bank financial data (the FR Y-9C dataset) into RUs (risk units), the new additive risk metric designed to express all forms of operational risk.

Read more on GARP’s website

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The Objective

A guiding principle of Risk Accounting is that material exposure to operational risk is created upon the acceptance of sales or trades, as this is what activates banks’ supply chains and operating infrastructures. The test, covering the eight years immediately preceding the global financial crisis, was focused on a calculation of exposure to inherent operational risks, which is the amount of accepted risk before considering the risk-mitigating effects of internal risk management activities and processes.