CALCULATING AND CONQUERING OPERATIONAL RISK
RC: Could you provide an insight into the importance of measuring operational risk and the specific challenge this poses for banks? What are the dangers of failing to adequately address such risks?
Ravazzolo: For banks, understanding, measuring and managing operational risk has become more crucial than ever before. This is not only because of the unprecedented wave of losses that banks have suffered since the 2008 financial crisis, it is also due to the actions taken by regulators to develop new capital frameworks and to address banks’ liability. Such actions have increased operational risk losses and capital requirements. This has had an unprecedented impact on banks’ balance sheets, often requiring them to access shareholders and capital markets to raise necessary equity. In addition, what is less obvious but becoming more important is the increased reputation and litigation or legal risks, and exposure to catastrophic risks scenarios not only arising from the tougher regulatory and litigation environment but also from financial crime. In particular, cyber crime in today’s globalised, complex and digitalised financial services environment has the potential to hit banks’ revenues and profitability in an unprecedented manner. All of this makes ORM extremely important and crucial for banks. In terms of managing operational risk, there are some key challenges worth highlighting. First is the inevitability of operational risks.
Jul-Sep 2017 Issue
Zurich Insurance Group