The-Importance-of-Op-Risk-Management

The Importance of Operational Risk Management

Operational Risk events can reduce profitability and increase a company's volatility of earnings, thereby adversely affecting its external credit rating. In addition, where a higher regulatory capital charge is incurred, profitability will be further reduced. These factors impact upon an organization’s cost of capital and share price, influencing its reputation, overall competitive position, and longer-term survival.

Fundamentally, Operational Risk is concerned with the efficient and effective management of an organization. In particular, it addresses the risk profile of the organization, determined by the likely impact of loss (resulting from the probability of failure due to external events, people, systems and procedures).

Operational risk management impacts, either directly or indirectly, on bottom line performance. It is becoming central to fundamental analysis, with analysts increasingly including it in their assessment of the management, their strategy, and the expected long-term performance of the business. Optimization of the risk-reward relationship, in order to optimize stakeholder value and increase competitive position, is of fundamental importance. Institutions are focusing increasingly on optimizing their efficient and effective use of capital. Good risk management provides a firm with greater flexibility in deciding where to invest that capital. In addition, good operational risk policies and procedures, properly executed, are necessary for quality customer service, which leads to a growing satisfied customer base, producing smoother and more stable cash flows.

Given the increase in sophistication and complexity, together with the inexorable drive towards consolidation and/or specialization (not limited to the global financial services industry but also evident in other industry sectors) operational risk management is being seen as a potential differentiator and a source of competitive advantage. Emphasis will be placed on the quality of management and their ability to correctly assess, manage and optimize risk.

At an international level, organizations such as the World Bank and the OECD have stated that there is evidence to suggest that countries and organizations demonstrating sound management, evidenced through corporate governance, command, a premium in the market, enabling them to attract more funds at lower rates. The existence of operational risk events such as fraud and corruption are seen as the greatest obstacles to economic and social development. They undermine growth by reducing available resources, distorting the rule of law and weakening the institutional foundations on which economic development depends.