Where Next with Operational Risk?

Observation and measurement issues pose continuing challenges

As a researcher, I spend a good deal of time reading academic papers. One recently came into my hands written by an eminent group of academics and practitioners on the topic of systemic risk and financial stability. It included this comment: “A risk is inherently unobservable – only outcomes are observable.”

This statement, presented as fact rather than conjecture, should give us cause for concern. Why? Because its apparent acceptance as a truism could be due to the failure of risk managers and accountants to provide boards, management, investors, regulators and other stakeholders with a means of effectively monitoring and managing accumulating operational risks. After all, if you can’t observe something, you have no means by which to manage it.

 

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“A risk is inherently unobservable – only outcomes are observable.” - Really?

Despite 20 years of endeavor, it’s thumbs down for banks’ approach to operational risk management (ORM). The Basel Committee on Banking Supervision has abandoned the banks’ flagship advanced measurement approach (AMA), and C-suite executives wonder what possible business value can be derived from subjective, non-aggregatable color-coded risk-and-control self-assessments.