Operational risk management is an important form of risk management. In commercial enterprises, operational risk management is the supervision of different types of operational risk occurring on a daily basis. Credit risk or market risk is not a part of operational risk.
About Operational Risk Management
Operational risk management is also known as ORM. With the help of operational risk management, various types of operational risks are managed that occur on a daily basis.
These risks include the risk of loss consequent to poor or unsuccessful internal methods, machinery and human resource, or extraneous happenings.
Important Advantages of Operational Risk Management
Following are the most important advantages of operational risk management:
Decrease in losses arising from operations
Reduced auditing/compliance expenses
Decreased vulnerability to risks in the future
Early sensing of illegitimate functions
Types of Operational Risk
According to the Basel Committee on Banking Supervision, the events, which lead to operational risks, can be categorized into the following types:
External Fraud: Risk arising from fraudulent activities from a third party, for example, robbery, theft, phishing or hacking.
Internal Fraud: Risk arising from fraudulent activities from internal parties.
Products, Customers and Business Practices: Risk resulting from inadvertent or careless failure to satisfy a professional responsibility to particular customers (involving fiducial and appropriateness necessities) or from the characteristics of configuration of a commodity.
Workplace safety and employment practices: Risk arising from non-compliance with health, employment, or safety acts or from disbursal of claims related to personal injury or from inequality/unfair treatment
System failure and business interruptions: Risk resulting from interruptions of business operations or system breakdown. These include telecommunication, computer software, or computer hardware failure and equipment failure.
Damages to tangible properties: Risk resulting from damages or losses of tangible properties due to natural calamity or other occurrences.
Execution, supply and process management: Risk arising from failure in process management or transaction processing due to poor association with vendors and commercial service providers.
These involve the following:
Performance & maintenance miscommunication
Missed responsibility or deadline
Data entry, preservation or loading fault
Failure in delivery
Entity assignment fault
Failure in reference data preservation
Failure from collateral management
Unsuccessful compulsory reporting liability
Reporting & monitoring failure
Client Intake & Paperwork
Erroneous external report (incurring loss)
Incomplete or misplaced legal documents
Overlooked client disclaimers/permissions
Unauthorized access offered to accounts
Client/Customer Account Management
Careless damage or loss of customer assets
Inappropriate customer records (incurring loss)
Failure on behalf of commercial partners and non-client vendors and vendor disagreements
Operational Risk Management Software:
At the present time, a number of software products have been introduced for the purpose of operational risk management according to the Sarbanes-Oxley Act. With the help of this software, financial audit can be performed at cheaper expenses. Forrester Research has recognized 115 Risk and Compliance and Governance marketers, which deal with operational risk management programs.
Last Updated on : 8th July 2013