Managing Operational Risk: Risk Reduction Strategies for Investment and Commercial Banks

Operational risk should take an equal place alongside credit and market risk in the risk management strategy of all financial institutions. This volume is an invaluable guide to operational risks and their mitigation. Divided into four sections it begins by identifying twelve factors that characterise operational risk. The first section examines operational risk in the contexts of merchant, corporate, investment and private banking and the insurance industry. The second demonstrates how operational risk can be managed and controlled and examines cases of operational failure, including Credit Lyonnais and NatWest Markets. The third identifies legal risk including cross-border conflicts of law, compliance and taxation issues and environmental factors. The final section assesses the risk in payments and settlements including dematerialisation, the role of IT solutions, handling intraday exposure and delivery vs payment issues. Every financial institution should understand and protect against these risks and this unique and timely guide will ensure you establish an effective strategy for managing operational risk.

Table of Contents:
Part One - The new focus for regulators 1. Operational risk defined Introduction Dimensions in the definition of operational risk Operational risk mismanagement Aggravating factors The Basle Committee's approach Higher capital requirements Organisational and skill requirements Notes 2. Operational risk in retail, corporate and investment banking Introduction Retail banking: New opportunities and risks Reputation risk, product innovation and non-bank competition From single product commercial banks to conglomerates Transfer pricing, loans and derivatives Structuring risk management Notes 3. Operational risk in private banking Introduction Investment banking and personal banking synergy Asset management targeting the wrong population Discretionary portfolio management Investment managers and funds: Some precautions Biased advice Notes 4. Operational risk in insurance Introduction Insurance companies enter retail banking Risks specific to insurance Regulatory issues impacting on operational risk Finite risk and alternative risk transfer Captives Catastrophe reinsurance through the capital markets Notes Part Two - Managing and controlling operational risk 5. Agency costs: A prudent operational risk policy Introduction Service economy vulnerability Identifying risk-creating activities Rigorous internal control systems Documentation risk Solutions to operational risk control Notes 6. The dangers of uncontrolled operational risk Introduction Losing the ability to say 'No!': Credit Lyonnais Debt transfer: NatWest and Banca di Roma Crony capitalism: Daewoo Metallgesellschaft and the Schneider affair Derivatives: McDonald's Measuring, monitoring and analysing risk Notes 7. The role of improved organisation and structure Introduction Sound management via solid organisational fundamentals Internal control and transparency The MeesPierson model Organisational studies, staffing and cost control Streamlining operations and monitoring essentials Notes 8. Using technology to bend the curve of operational risk Introduction Technology innovators Case study: Lloyds Bank forex deals Mathematical risk analysis Developing an approach to risk governance System analysis and design for private banking A process control perspective Notes Part Three Legal risk 9. Legal risk: An evolving and complex issue Introduction Contract enforcement The board of directors and shareholder activism Clarifying the sources of legal risk Insurance contracts and master agreements The impact of political risk Notes 10. Management responsibility for legal risk Introduction CEO accountability Using discovery in assessing exposure Transparency and collateral Taking stock of legal risk with derivatives Internal and external procedures Notes 11. Legal risk and taxation rules: A synergy analysis Introduction Conflicting international tax regimes Shifting ground in international taxation Technology and the legal aspects of taxation Expert systems for investing and tax advice Dangers of regulatory and legislative variance Notes 12. Physical and economic aspects of environmental risk Introduction The Comprehensive Environmental Response, Compensation and Liability Act Social and financial problems with environmental risk litigation The economic environment and legal risk Unresolved social, political and taxation issues Scientific evidence Notes Part Four Rethinking classical operational risk: Payments and settlements 13. The new generation of payments systems Introduction The evolution of payments systems Business architecture: Home of the payments system Model of a real-time global payments system A microscopic viewpoint Macroscopic aspects of payments risk Notes 14. Intraday exposure Introduction Protecting institutions in the payments stream SQC charts: A solution to intraday exposure? Monitoring intraday payments Who guarantees major default in intraday payments? The role of the Internet Notes 15. National and cross-border settlements solutions Introduction Problems with current settlement systems New concepts of settlement risk Stock exchange mergers and settlement risk Intraday overdrafts: Payments and settlements Designing and implementing RTGS systems Origins of the EU RTGS system Challenges faced by the EU's RTGS solution Notes 16. Dematerialisation, securities lending and DVP Introduction DVP, custody and the management of settlement risk Risk analysis of dematerialisation operational requirements DVP limitations Securities lending and operational risk Designing, developing and implementing DVP infrastructure Notes

Review :
"...another tour de force on the part of Dr. Chorafas...the true nature and ramifications of operational risk are superbly illustrated" Gunnar T. Andersen, Managing Director & Member of the Executive Board, International Banking & Treasury, Landsbanki Islands h.f.