On the evening of May 24, 2018, the New Horizon Career Club (NHC) held the third session of the 2018 Risk Salon. The session, which was the last in this year’s salon, focused on Operational Risk (Op Risk). The audience had a great opportunity to hear the expert opinions on Op Risk, shared by guests from the risk management and front office groups in major Canadian banks and consulting firms.
– Part 1. OP Framework –
Ms Dragica Grbavac (Managing Director, Uvidi Management Group) first introduced the conceptual framework of Operational Risk. Operational Risk is one of the most important risks for a financial institution, besides credit risk and market risk. As defined by Basel II, Operational Risk is “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. As long as people, systems and processes remain imperfect, operational risk will always exist and cannot be fully eliminated.
Operational risk is not new to us, such as 2008 financial crisis (people & process), Equifax breach (system), fraud, cyber attack, etc. Since such events can occur almost anywhere, it has been a huge challenge to quantify and mitigate operational risk.
– Part 2. Risk Management Tools –
Risk & Control Self-Assessment (“RCSA”) was introduced in the early 2000’s to decentralize risk assessments across the organization, notably across financial services, and to achieve greater internal control, hence, to reduce operational risk. This is a survey style “checklist” of key controls and process, which encourages business units to be proactive in identifying emerging and inherent risks, and to enhance overall awareness, responsibility and accountability for risk.
Another important tool for better risk management is the famous “Three Lines of Defense”. The first line is the business unit (risk owner) who should know and manage their risk, the second line is the risk management team in the middle office who monitors and measures this risk, and the third line is the audit team who oversees and audits the overall process.
– Part 3. Panel Discussion –
A panel discussion followed the presentation, in which Dragica was joined by Ms Yaping Jiang (Director, Model Risk Oversight & Compliance, BMO) and Mr Alex Shipilov (Managing Director, Protiviti). The discussion was moderated by Mr Dmitri Rubisov (Managing Director, BMO Capital Markets).
According to the panelists, one of the main challenges for measuring operational risk is that the Op Risk events are hard to identify and capture, and often misclassified with other risk types. For example, a rogue trader (a person who makes unauthorized trades) made a huge loss in trading, which seems to be related to market risk. The unauthorized trading itself, however, should be classified as operational risk. Secondly, besides of its ambiguous nature, operational risk is very difficult to quantify. Even the most sophisticated model, the current Advanced Measurement Approach (AMA), is under scrutiny as it’s not comprehensive and not easily comparable across the industry. Although it’s very difficult to manage operational risk, the effort is rewarding.
According to the panelists, the biggest components of operational risk management, such as RCSA, can lead to a culture change of the entire organization. What’s more, it may improve process transparency and effective internal control environment. At the end of the panel discussion, the audience asked the panelists what kind of talents would succeed in operational risk management. The panelists all agreed that the ideal operational risk manager would be someone who has seen a lot of problems and been able to solve them. This kind of people can see what process people usually miss, is able to observe patterns and identify problems, and eventually solve these problems by taking actions to prevent Op Risk events from happening in the future.
This Operational Risk session helped the audience understand the evolution of risk measurements and the key features of operational risk framework. Great thanks to all the panelists for providing those great insights to the audience. We believe young professionals and new graduates who attended this session benefited from this great learning and networking platform built by NHC Risk Salon.
Finally, special thanks to Mr Dmitri Rubisov who has been a great support to the 2018 NHC Risk Salon . He helped invite distinguished speakers and panelists, moderated the panel discussions, networked with the Risk Salon audience, reviewed our event review articles and did many more. This has been the 4th year that we organized the Risk Salon and Dmitri has been helping us for 4 years. He is a biggest reason that the event is a success every year. We hope with his support, the event organizing committee’s effort, and the audience’s interest and participation, we will make this event better and better every year!
— written by Wellen Gao