The Evolution of Operational Risk Management: A Journey Through Time

Operational Risk Management (ORM) has become a crucial aspect of business strategy in today’s fast-paced and volatile market environment. According to a survey by the Institute of Operational Risk, 71% of organizations consider operational risk management a key priority for their business. In this blog post, we will delve into the development history of operational risk management, exploring its evolution over time, and highlighting key milestones, challenges, and best practices.

Early Beginnings: 1970s-1990s

The concept of operational risk management has its roots in the 1970s and 1980s, when banks and financial institutions began to recognize the importance of managing operational risks. During this period, operational risk was primarily associated with back-office functions, such as settlements and transaction processing. The focus was on ensuring that these functions were executed efficiently and accurately, with minimal errors or disruptions.

In the 1990s, the Basel Committee on Banking Supervision (BCBS) introduced the first set of guidelines for managing operational risk, which emphasized the importance of identifying, assessing, and mitigating operational risks. This marked the beginning of a more structured approach to operational risk management, with a focus on risk identification, measurement, and mitigation.

The Rise of ORM: 2000s-2010s

The early 2000s saw a significant increase in the importance of operational risk management, driven by a series of high-profile operational risk failures, including the collapse of Barings Bank in 1995 and the National Australia Bank’s foreign exchange trading scandal in 2004. These incidents highlighted the potential consequences of poorly managed operational risk, including significant financial losses and reputational damage.

In response, organizations began to invest more in operational risk management, developing more sophisticated risk management frameworks and tools. The BCBS introduced the Basel II framework in 2004, which included a more detailed set of guidelines for managing operational risk. This framework emphasized the importance of operational risk management as a key component of overall risk management.

Operational Risk Management in the Digital Age: 2010s-Present

The 2010s saw a significant shift in the operational risk landscape, driven by the increasing use of technology and digital platforms. The rise of cyber threats, data breaches, and other technology-related risks created new challenges for operational risk managers.

In response, organizations began to develop more advanced risk management tools and techniques, including risk modeling, scenario planning, and stress testing. The BCBS introduced the Basel III framework in 2010, which included more stringent requirements for operational risk management, including the use of more advanced risk measurement and mitigation techniques.

Best Practices in Operational Risk Management

So, what are the key best practices in operational risk management? Here are a few:

Establish a clear risk management framework: Develop a clear and comprehensive risk management framework that includes risk identification, assessment, mitigation, and monitoring.
Identify and assess operational risks: Identify and assess operational risks across the organization, using a combination of qualitative and quantitative techniques.
Implement effective risk mitigation and control measures: Implement effective risk mitigation and control measures, including policies, procedures, and technical controls.
Monitor and review operational risks: Continuously monitor and review operational risks, using a combination of risk metrics and key performance indicators (KPIs).

Conclusion

Operational risk management has come a long way since its early beginnings in the 1970s and 1980s. Today, it is a critical component of business strategy, with organizations recognizing the importance of managing operational risks to ensure business continuity and success.

We would love to hear from you! What are your thoughts on operational risk management? What are some of the key challenges and opportunities that you see in this area? Leave a comment below and let’s continue the conversation.

Statistics:

71% of organizations consider operational risk management a key priority for their business (Institute of Operational Risk)
60% of organizations have experienced an operational risk failure in the past three years (BCBS)
40% of organizations have invested in operational risk management tools and techniques in the past two years (Ernst & Young)