Operational Risk Management

Chapter 3

Case Studies

Learning objectives

After studying this chapter, you should be able to:

1 Evaluate and analyse the basic operational risk factors that can lead to loss events from process, people, system, and external causes

2 Understand the background and chronology and analyse the risk factors and response in the DBS safety box case, the Société Générale trading losses in 2008, the crash in the Tokyo Stock Exchange in 2005 and its impact on Mizuho Securities, and the impact of the bomb blast at the World Trade Center in New York in 1993

3 Understand and articulate the key lessons learned from the four case studies

Introduction

The first two chapters set out, in somewhat theoretical terms, the basis of operational risk, its definition, and approaches to manage it. Later chapters will explore in greater details how banks can measure, manage, and mitigate operational risk and risk-related events. Before doing that, however, it would be useful to understand the ultimate depths of operational risk, what failures can mean, and how strong operational risk management can prevent catastrophic losses from large loss events.

Catastrophic loss is a very small part of unexpected loss, meaning that it occurs very rarely. If it happens, though, a bank or financial institution can be brought to its knees. By definition, catastrophic loss is extremely severe. Large loss events are also unusual but hardly rare. From flash crashes in stock markets to bombings and poorly designed software ...