Fundamentals of Risk Management

operational risk management
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Developments in operational risk
Before considering developments in operational risk, it is worth noting that 
concerns about operational risks are universal in all organizations. Although the 
banks and other financial institutions may have a specific approach to operational 
risk, the issues that are being considered are the same issues that affect all other
types of organizations in the public, private and third sectors. (The third sector
refers to not-for-profit organizations, including charities, membership and voluntary 
bodies.)
Although the issues are the same, the approach in banks and other financial
institutions can be different. In a non-financial institution, the questions related
to operational risk may well be: ‘What is the value of my assets, how do I protect 
them and to what extent and value (or limit of indemnity) do I need to purchase
insurance?’ In the financial sector, the questions are more likely to be: ‘What are the 
Financial
industrial
Errors mostly arise when people reach 
their mental limits
Errors are mostly due to people reaching 
their physical limits
Systems are highly complex and 
widely distributed and the environment 
is only partly manageable
People are working in relatively simple 
relationships and the environment is highly 
manageable
Loss prevention is concerned with 
security of value and assets
Loss prevention is mainly concerned with 
physical safety, equipment protection and 
avoiding accidents
Loss prevention is aimed at avoiding 
financial loss
Loss prevention is aimed at avoiding 
physical harm to people or equipment
and/or the manufacture of faulty goods 
(scrap)
The main incentive for committing 
mistakes is personal financial gain or 
self-interest
The main incentive for making deliberate 
mistakes is reducing effort or (possibly) 
sabotage
Risk management is a key skill in 
financial services and has central 
importance to the organization
Risk management is not central to 
operations, although the aim is to avoid 
disruption to manufacturing processes