The banking sector should rank foremost among the many sectors of the economy that have undergone drastic changes in the last couple of decades or so. The convergence of two colossal factors – globalization and the development of technology – has made inroads into the banking sector, impacting it with a force that was seldom seen earlier.
The number one area of the banking sector to be affected by these changes is operations. Many factors such as credit, software, etc. need to be regulated for their risks. However, the core of the banking sector is operations. Because of this, operational risk management in banks is the highest priority for banks.
The Basel Accords
The primacy of operational risk management in banks can be understood from the fact that one of the most important regulations aimed at the banking sector, the Basel Accords, a series of plans to regulate the banking sectors around the world; has operational risk management in banks on top of its agenda. Operational risk management in banks is one of the four areas identified at the second of these conferences, Basel II, the others being regulations concerning capital allocation, disclosure requirements and regulatory arbitrage.
Operational risk management in banks according to Basel
The Basel Accord takes a very comprehensive view of operational risk. It describes operational risk as loss that can occur from a variety of reasons, all of which are linked to the core banking structure. The Basel Accord sees risk as something that can happen from any of the operations concerning the bank. It requires operational risk management in banks to take all of these factors into consideration before arriving at solutions to prevent loss from these operations.
From the Basel Accords perspective, operational risk management in banks need to take into consideration the following events and identify all of these in identifying frauds and losses:
Any fraud from any of the bank’s employees, insider trading, false reporting of profits are among the kinds of activities listed by Basel as being part of internal fraud.
External fraud can happen from a number of sources. It could be robbery, burglary, hacking of security systems or check bounce. These are part of operational risk management in banks.
Employees can be a major source of bank fraud. Steps towards mitigating actions from employees that endanger the functioning of the bank constitute a major step in operational risk management in banks.
Other kinds of frauds
Operational risk management in banks has to also take other sources of fraud. These can be from wrong entry of accounts, improper documentation for credit or loans, etc.
Ways of applying operational risk management in banks
Basel II has suggested methods which banks can take to apply risk management in their sector. These include: