After studying this chapter, you should be able to:
1 Understand what goes into mapping the operational risk profile of an institution
2 Outline the importance of reporting and the different types of reports that can be used in operational risk management
3 Understand key risk indicators (KRIs) and their role in setting thresholds and escalations triggers
4 Know the value of operational checklists and the areas of operational risk that they focus on
The passive steps used in developing an operational risk management framework are necessary to determine what active steps to take. The effectiveness of both depends on the quality of operational risk reporting, both to internal stakeholders such as senior management and the board of directors, and external stakeholders such as regulators. The process of accurately reporting existing and emerging risk factors and, perhaps more importantly, risk events, are key to the operational risk management process.
In order to understand the effectiveness of the reporting process, it is necessary to understand the operations of a bank and the risk attached to each one. An operational risk profile or “heat map” is often used to this end. A heat map examines the capacity of each business unit to bear risk. Operational risk events can have a direct impact on the operations and even the market value of a bank.
Reporting is the last passive step in the operational risk management process. The ...