Banks should monitor operational risk internally
Hindu Business Line, September 9, 2008

Hyderabad, Sept. 14 Banks should depend on their own internal measures to manage operational risk instead of outsourcing or centralising the process, according to Ms Renu Challu, Managing Director, State Bank of Hyderabad .

Under Basel II norms, operational risk has been defined as "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events."

Speaking at a seminar on operational risk management in banks and insurance companies, jointly organised by Siva Sivani Institute of Management and Professional Risk Managers' International Association, here on Saturday, Ms Challu said the increasing sophistication of financial products had made risk management all the more difficult.

"By its very nature, operational risk is not so predictable and, therefore less open to mathematical modelling," she said adding that the sub-prime crisis in the US is nothing but a failure of risk comprehension.

Training inputs and risk communication programmes are essential for highlighting possible conflict areas and the desired response, Ms Challu said.

Dr Russell Walker, Assistant Director, Zell Centre for Risk Research, Kellogg School of Management, US, said banks in India should create a framework and develop a culture for reporting and managing risk.

"As operational risk is the one most likely to end a bank, invest heavily in understanding your (a bank's) operational risk," Dr Walker said.

Later, speaking to Business Line, Dr Walker said blind adherence to Basel II norms may not give a "healthy edge" to Indian banks. "What Basel II adopted is a capital adequacy-centered approach which is not the only prescription to protect a bank," he said.

The sub-prime crisis is not something 'exclusive' for the US and Europe and it can impact any financial system globally if there is laxity in checking operational risks, he added.

Russell Walker