Waking the Sleeping Giant

Dr Simon Ashby (), David Clark () and John Thirlwell ()
Additional contact information
Dr Simon Ashby: Plymouth Business School, Postal: Drake Circus, Plymouth, PL4 8AA
David Clark: Wholesale Markets Brokers Association, Postal: St Clements House, Clements Lane, London, EC4N 7AE, http://wmba.org.uk
John Thirlwell: Institute of Operational Risk, Postal: 76 Little Bushey Lane, Bushey, Hertfordshire, WD23 4SE

Journal of Financial Transformation, 2011, vol. 33, 1-13

Abstract: Within the banking sector operational risk is often perceived to be a less

important risk than financial risks such as market or credit risk. Such a view

is typically reinforced by the observation that banks are in the business of

taking these financial risks and must lend large amounts of money and/or take

significant market positions if they are to make an acceptable profit for their

owners.

Events such as the global financial crisis would also seem to reinforce this

view of the pre-eminence of financial risks. Taken at face value the crisis

might appear to have been caused by a combination of excessive lending, leverage

and derivatives trading - activities which fall with the realm of financial

risk. Yet deeper investigations into the crisis have revealed that other more

complex forces were at work, forces, such as failures in people, process and

systems which have more in common with the field of operational risk.

In this paper we argue that banks must do more to wake the sleeping giant of

operational risk management in their activities. We demonstrate how operational

risk related failures in people, processes and systems lay at the heart of the

global financial crisis, leading to disastrous consequences not only for

individual banks, but also for the financial sector as a whole and the domestic

economies that are supported by it. We also highlight three key barriers that

we believe are preventing the discipline of operational risk management from

reaching its full potential in the banking sector. Finally we identify a number

of themes that we believe should be embraced by banks and their regulators to

help overcome the three barriers and enhance the management of operational risk

across the sector.

Keywords: operational; risk (search for similar items in EconPapers)
JEL-codes: Z19 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1521

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