Celent Communications predicts that global expenditure on operational risk management initiatives could hit $12 billion by 2005. The prediction appears in “Basle II: A False Sense of Security?” – a new report from Celent which reckons operational risk weightings are by far the most significant change to the accord.
“Due to the catch-all nature of operational risk which, as defined by the Basle committee, includes such diverse business processes as IT systems maintenance and trade processing, many firms will struggle to meet the twice-postponed target implementation deadline, now set for the end of 2006 ,”says the Celent report . ” Large, internationally active firms, for which the accord was primarily intended, will tend to do better due to their greater resources and budgets. Mid-size firms will struggle most, as their size increases the complexity of successfully executing new risk management and capital allocation approaches while limiting available funds and in-house talent. Smaller firms could quickly employ new Basle techniques, but outside of the European Union, where adoption is mandatory, there is less regulatory pressure to do so. “
“The financial services industry has been slow to learn from the lessons of the manufacturing and engineering industries,” adds Michael Haney, a senior analyst at Celent and author of the report. Although significant progress has been made in the areas of financial risk management, including credit and market risk, operational risk measurement programs have only been developed and become integrated into the day-to-day management of a much smaller group of institutions.
“Defining and quantifying operational risk metrics that are tailored to individual lines of businesses will be a major challenge. Firms need to create the proper incentives so that management and other stakeholders not only develop the correct initial approach, but also ensure it incorporates the concept of continuous process improvement,” says Haney.
The report presents two case studies and makes recommendations for how banks can create the right environment and framework for successfully rolling out a risk management program.
The report includes 14 figures and 4 tables. A Table of Contents is available online.