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Introduction:

Risk refers to the unknown probability of the occurrence of certain events that could have negative impacts on the business operations of a firm. There can be a wide range of risks however the current study deals with only operational risk management. Three different articles have been chosen for this purpose. This is followed by a critical discussion on operational risk management in context of the three articles.

Article 1:

Mestchian, P., Makarov, M. and Mirzai, B., 2005. Operational risk–COSO re-examined. Journal of Risk Intelligence, 6(3), pp.19-22.

Article 2:

Jednak, D. and Jednak, J., 2013. Operational Risk Management in Financial Institutions. Management, pp.66.

Article 3:

http://www.cimaglobal.com/documents/importeddocuments/51_operational_risk.pdf [Accessed 27 Jul. 2016].

Discussion:

The article examines the various approaches to managing operational risks. Here, it is important to note that operational risks are different from that of financial risks and thus require special treatment. The article holds that certain types of operational risks can be measured like external or internal frauds, crash of information system and similar others. However, other types of risks like moral hazard behavior, overlooking in operational matters and others are tough to measure because of specific characteristics and inadequate data (Cole et al. 2013). Hence, for managing, measuring and identifying operational risks it is vital to rephrase the current definition of operational risk first. In other words, the authors suggest that operational risks needs exemptions and special treatment. Here, the researchers further propose that post exemption of the IT related risks the definition needs to be supplemented with the major factors associated with operational risks as negative selection and moral hazards.

As a part of the risk identification process, the authors have classified operational risks into internal risks and external risks. Internal risks have been further subdivided into people, process and systems related risks. The article also discusses various approaches to operational risk management as top-down and bottom-up approaches. The top-down approach seeks to measure operational risks at the broadest level whereas bottom-up approach begins with individual processes or people (Meunier and Bakker, 2016). On the other hand, the researchers classify operational risk assessment tools into several categories as audit control, critical self-assessment, key risk indicator, casual networks and actuarial models. This is followed by implementation and monitoring of the operational risk mitigation strategies.

As regard to reduction of operational risks, the same can reduced through internal or external control techniques. Separation of functions, dual entries and synchronization are the key internal strategies for reduction of operational risks (Chen et al. 2013). On the other hand, external reduction tools comprise of confirmation, verification, authorization and balancing.

Operational Risk concept can be revisited with development and advancement in technologies. Standardization of procedure, implementation of advanced tools and thorough understanding of the process basics of any line of business can be effective in realization of operational risk management.  Risk can be understood by capital at risk perceptions as suggested by COSO guidelines. The evaluation of expense associated with risk can be figured by the aggregate of estimated loss and the expense associated to make up the unpredicted loss.

The risk associated with any operational method can be assessed by graphical plotting of likelihood of risk occurrence versus impact of the risk. The outcome in the form of matrix is evaluated against the mapping termed as risk appetite which indicates the maximum level of risk that the organization can be able to bear.

The former concepts of operational risk management by either statistical or subjective approach have been replaced by a combination of both. Effective evaluation of risk can be best evaluated by combined approach of data driven and subjective approach as statistics alone cannot identify the unforeseen risk or such that occurs for the first time.

Meunier and Bakker (2016) mentioned that the motto of operational risk management in any business is always to identify, evaluate and eliminate or mange the risk for smoothening the operation process.  The process of risk management is developing with time and the efficiency of the same can be acknowledged in the form of compliances in several internal and external audits of the organization. The approach has to be apt and logical involving concepts for multi discipline. Organizational plan, process management, finance, statistics, business management and even total quality management can be used in appropriate combination to frame out optimum risk management plans for the organization.

The concept of risk management needs to be realized prior to implementation (Chen et al. 2013). Rigidity is opposed to any situation of risk management which can lead to low scope oriented resolutions accompanied with flaws. Operational risk management can be seen ideally as a technical tool capable of resolving identified risk only when operated by capable and knowledgeable experts with flexibility and innovation.

Stages of Operational Risk Management:

The evaluation and management of risk needs identification of risk in any business. Some of the innumerable risks can be associated with the following:

• Disturbances in business process
• Operational errors
• Defective product manufacture
• Safety and health related hazards
• Malfunctioning of internal systems
• Loss of useful resources
• Get cheated by fraudulent activities of others
• Legal complications in operations
• Statutory obligation and bindings

Operational risk can be associated with many others as well as combination of any or many of the above stated issues. Internal risk management can be helpful in mitigation of the associated risk sin any systems.

Risk Categories:

The Identified risks can be categorized into major 4 subtypes as below:

• Financial risk
• Operational risk
• Reputational risk
• Environmental risk

Categorization of the risks can be beneficial in identifying the responsible persons for mitigating the risk. The identified categories can be used to point out similar risks in the same category can use the experiences to manage the future risks.

In this view, Cole et al. (2013) stated that operational risk management can be processed by efficient experts using different methods of audit like risk ranking method, comparison with risk matrix and intuition based assessment. Intricate observations at the process, performing personnel, functioning machineries, systems and external bodies can also help in risk investigation. The main aim is to assess and manage the risks mainly at the operation level.

Risk can be assessed by identification of the likelihood of occurrence of any risk. The risks can also be qualitative like chances of legal proceedings or reputation affect instead of specific and quantitative risk like financial risk. The impact of the same risk can be marked on the basis of the effect that can be imagined or on the basis of past experiences. Overall risk rating measurement can be depicted on an impact –likelihood matrix.

The risk can impact specifically three areas of business operations. Employees, property or even financial risk impacts are identifiable. Cole et al. (2013) stated that the risk control measures need to be implemented once the risk and impact of the same is measured. Retaining risk, reducing risk, avoiding risk and risk sharing are the basic types of dealing with risk.

The most significant factors that evaluate the effectiveness of risk management system can be seen as follows:

• Leaders from senior management to deal with risk management
• Transparent risk management policies and clear communication at all involved levels.
• Regular monitoring on the risk management and regular review of report
• Organizational objectives are linked with mitigation of operational risk management

Conclusion:

The current piece of work indicates that there is a high need to differentiate operational risks from other types of risks and thus operational risks need to be treated differently. Furthermore, the study reveals that risk identification, risk assessment, risk mitigation technique selection, strategy implementation and monitoring are the main phases of risk management process. However, operational risks can be measured through external or internal techniques.

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