Operational risk in the financial sector
Activities of every kind in the world are associated with some risk which often is called Operational Risk. In the process of initiating a task to its completion has an inherent risk associated with it which needs to be mitigated or minimised to ensure a very successful task.
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Operation risk is explained as the risk of loss resulting from failed or inadequate internal process, people and system or from external events associated with the day-to-day transactions of a bank. This risk arises in all departments of the bank, i.e. from Credit, Finance, Treasury, Investment and Information Technology. Most banks in Ghana over the years have lost huge sums of cash due to failed internal processes, mostly the people and systems they use. Industry expects have attributed these losses to lack of training for the staff of the banks.
Some of these operational risks faced by the banks are: Payment of crone cheque, ATM pin code thief, cheque incorrectly cleared and paid, and wrongly honouring a fake cheque and the like.
There is the need for banks to take the operational risk control process seriously by educating & training their staff on regular bases. In recent times, the rise in the quest for banks to pose huge profit at the end of the year has shifted the focus from concentrating on the most operational risk that confronts their operations.
Robust systems should be put in place at all levels of the bank’s operations to identify risk and assess its severity with recommendations to mitigate the risk.
Causes of operational risk
Operational risk has several causes which may occur as a result of the people or systems used by the bank. Unfortunately it is very difficult to prepare an exhaustive list of causes of operational risk. Most of them may occur from unknown and unexpected sources. A cursory review and study of operational risks that are inherent in a bank’s operations can be categorised into three types.
People Risk:
This risk is very prevalent in most banks due to the lack of training for the staff of the bank to equip them to be able to identify some of the red flags when they show up. Incompetency and lack of experience with skill also contribute to banks recording huge losses as a result of the risk associated with the day-to-day operations.
Banks not remunerating their staff well is also an operational risk, reasons being that the staff will not concentrate on the bank business but rather focus on the family issues they face.
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Information technology risk:
The failure of the information technology system and software implementation process of a bank causes losses to the bank. There have being numerous instances where banks lose huge sums of cash during implementation processes of new software as a result of lack of training and understanding of the software.
The hacking of the computer network by outsiders, and the programming errors that can take place any time can cause losses to the bank; ATM card fraud, Internet banking lapses and the like.
Process-related risks:
Possibilities of errors in information processing, data transmission, data retrieval, and inaccuracy of result or output. The day-to-day transactions of the banking process have inherent risks associated with it, ie cheque payment, bankers draft & payment orders, credit appraisals etc.
What can be done to mitigate or control operational risk?
There are many ways risks can be controlled. There are two broad categories for controlling risk:
• At the bank level
• At the government level—having binding regulations
Control at the bank level
At the bank level, the risks are controlled by having rules, systems and processes that enable prudent banking and that are difficult to circumvent. These rules, systems and processes can be at the branch level, the department or unit level, and the top management level. The aim of such rules is to control risk. Banking processes, wherever possible, are standardised to avoid ambiguous interpretation by staff. As an example, a cheque clearance requires clearance from the branch’s bank manager or the operations manager.
Some industry experts have revealed that no matter how robust the rules, systems and processes might be, they leave a bank open to risk. Operational risks can quickly become a contagion and lead to a collapse of a bank.
Most operational risk can be mitigated and controlled through training and education of the staff of the bank.
Control at the government level
To reduce the chances of such occurrences and to control losses and impacts on the economy, governments, through their central banks and other bodies, regulate the banking sector. In Ghana, the main body responsible for this is the Bank of Ghana. Such regulations aim to strengthen banks’ abilities to survive shocks and reduce the risk in the banking, capital and financial markets.