Study: Risk Management in Banking

A recent study conducted by Bain & Company examined how banks can control and manage operational risks to avoid severe losses. Since the global financial crisis at the very latest, banks and the bodies that regulate them are required to control risks in an effective, sustainable manner. Once banks have established solid practices to manage financial risks through appropriate systems, their next challenge is to implement them for operational risks.

Should operational risks occur, the consequences could be fatal – both in a financial sense and for the reputation of the bank affected. From 2011 to 2016 alone, losses from operational risks totaled $210 billion. Compared to financial risks, operational risks are much more complex and challenging to control and manage. What’s more, operational risks are lurking just about everywhere – namely, in people, processes and systems. Aside from financial losses, legal fees, fines and other obvious short-term consequences of an operational risk event, there are also ongoing, indirect effects that can be even more dangerous. Examples include higher credit costs and mandatory increases of the thresholds for risk-weighted assets and reputation damages that can inevitably affect the view of relevant stakeholders.

Operational risks are determined by human behavior, organizational processes, cultural issues and other complex, interconnected factors that are difficult to separate. Many banks still have problems integrating their operational risk management in a comprehensive enterprise risk management as well as understanding, measuring and controlling the factors that constitute operational risk. They find it difficult to create cultural, leadership and management structures that can control these risks in a systematic manner. Instead of following an integrated, proactive, long-term approach to managing operational risks, they often control it with reactive, short-term measures.