Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. An operational risk officer should make recommendations to the board and related authorities on an annual basis on the risk appetite for principle risks, limits, and mandates, including governance standards, operational risk models, operational risk appetite, and operational risk stress testing tool.
Qualitative standards should include a supervisory soundness standard that all internally generated risk estimates have to meet, as well as criteria for the definition of operational risk embedded in the risk measurement system, the use of internal and external data, and validation of parameters and system output, data, and technology mechanisms which provide management with real time information about key risks and how they are managed (including the risk register). Unfortunately, even though quantitative techniques for measuring operational are evolving, there is still no broad consensus on the modelling methodologies of operational risk.
Running to your operational risk appetite requires a good deal of sophistication and standardization, as well as benchmarking, data mining, and modeling so as to encourage a continuous, exhaustive, measured, monitored, flexible, and time-bound response to a variety of events as they take place. Operational risk management acts as pre-empt to weak internal controls and frauds experienced by microfinance organizations to protect the integrity of employees. Subject to cost and affordability considerations, your organization should aim for a high appetite to recruit, retain, and develop the best quality staff for all research, teaching, and operational roles.
Fraud risk is a form of operational risk, which is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. Your business should aim to have an operational risk management system that is conceptually sound and is implemented with integrity, as well as having sufficient resources to use in approaching major business lines as well as the control and audit areas. Supervisors focus on financial resilience by requiring firms to maintain sufficient capital and liquidity and emphasize operational resilience by promoting effective corporate governance, risk management, and recovery planning.
Assess and oversee enterprise and business exposures, including key and emerging risks and the application of operational risk models and techniques in the industry, to serve as an example of how the use of advanced methodologies for operational risk management may contribute to adequate operational risk quantification and improved insurance programs. However, the definitive of risk types in external can be different, and some data may be estimates.
Your risk policy should account for guidelines affecting strong governance of operational risk. Economic capital usually has a key role to play in the quantification of risk and in embedding risk appetite in the operational infrastructure of a business. Being able to properly frame and negotiate risk appetite among the board towards a new strategy, and aligning that with appetite, is both a skilled ability and a challenge that requires perseverance and a willingness to compromise in negotiation.
Big data presents big opportunities for organizations to leverage internal and external information to develop a stronger, data-driven operational risk management program. Its purpose is to ensure the risk capacity and liquidity of a group and its entities and, subsequently, ensure business continuity. This is often accomplished by analyzing and assessing the risks and considering the likelihood and impact.
Regulation and external stakeholders on risk appetite, management, and culture provide risk management support for a line of business or staff organization in key risk identification, measurement, monitoring, control, and reporting, as well as an understanding of the management of risk through appropriate practices and processes. During each phase of an organization or process, business impact should be the guiding factor for risk analysis.
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