The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.

Risk management's final frontier

Banks measure credit and market risk because they can, not because these are the biggest risks they face. Operational risk is larger, more dangerous and no-one knows exactly what to do about it. Mark Parsley looks at banks' first faltering steps in this area

What is the use of having state-of-the-art market-risk measurement tools if one rogue trader can bankrupt your institution in a matter of weeks? Why bother with the complexities of modelling credit and counterparty risk if a fund manager at one of your foreign subsidiaries can cost you £200 million in cash, and untold millions in tarnished reputation and credit standing?

While the leading financial institutions can claim to have half-way scientific ways of measuring, monitoring and providing for credit and market risks, most would agree that they struggle even to define potentially the largest and most pernicious class of risks they face ­ operational risks. At the cutting edge, however, banks are now developing methodologies to complete the risk-management triangle. Their ultimate aim is a capital allocation system that takes all risks into account.

The pat definition of operational risk is simply any risk of earnings volatility that is not market or credit related. In this sense it is the set of risks banks share with most other publicly-owned commercial organizations: product liability risk, the risk of fire and explosion, business interruption risk of any kind, image impairment risk, directors' liability, technology risk and so on.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree