Determining Components of Operational Risks

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Table of Contents

Purpose
Aims and objectives
Design and proposed approach
Information to be gathered
Identification of potential solution to the problem/preliminary research
Research schedule
Research recommendation
Authorization
References

Purpose

The researcher is a branch manager heading the credit section in one of the branches of British Airways Company in the United Kingdom. He has been observing a situation where a risky event occurs unexpectedly inside the market and credit risk. The considerations have been that, operational risks are risky events outside market and credit risk because most institutions have managers who are specialists for market and credit areas. However, it is important for managers in any given institution to define their assessment regarding operational risk. This helps them to find if it should include risks such as misunderstanding of traders on sophisticated financial model, as this would greatly affect the performance of the mangers as well as the general team work. Some experts argue this kind of misunderstanding should be part of risk assessment while others argue that assessment of operational risk is a component naturally rooted in market risk. According (Smith, 2005), research has indicated that, there exist no “right” universal definition of operational risk and institutions make use of the definition that to a great extent fit their purpose. However, there are informal definitions by industry bodies in conjunction with regulators which have practical advantages. They help the traders to understand components of operational risks in accordance with the London-based British Bankers Association. This is a body actively involved in providing standard approaches regarding operational risks. The definition of operational risk according to this body is the risk of loss either directly or indirectly that arises from inadequate processes or internal processes that have failed. The body argues that, the loss can also be caused by people as well as systems and events happening outside institution.

Aims and objectives

The aim of the research will investigate various components of operational risks to improve the understanding required for enhancing individual and team performance. Regarding the objective of the study, by the end of the research, the researcher will explain the importance of linking up processes in an institution so as to design an approach with a checking account on the normal retail business. The findings will illustrate how details of swap transactions involving huge amounts of money in the markets by employees can be confirmed (Titman, 2002).

Concerning the stakeholder mapping in the project, the sponsor of the project will be the manager in the department of research in British Airways Company through the fund allocated for research projects. Mac William who is the financial adviser of British Airways Company has also proposed to have an input on the proposal. A discussion has already been held with the sponsors as well as the facilitators (Santomero, 2001).

Design and proposed approach

The project will involve twenty respondents; five from a bank, five from a textile industry and the rest will be employees of the British Airways Company. According to (Jackson H. (2004), the researcher will make use of an improved service of an information system that will enable him to respond to the enquiries from the respondents. This system will both be screen based as well as real time. The data collected from various sources will be analyzed and if it is compatible, will be compiled together. The researcher will call the respondents on the phone and inform them of the intended interview with them. He will also write formal letters to the same effect to officially book an appointment with them. Those who may not be reached through letters will be sent text messages. All the appointment will be done in good time. The researcher will finally make prior visit to the selected institutions and hold a brief with the respondents explaining about the importance of the research. The respondents will be assured that all the information will be kept confidential. The questions will be in form of questionnaires to find if people like assets; can be a source of operational risks in an institution. The respondents will be requested to provide examples of where such risks have occurred. The interview will also gather information concerning how the modern technology has contributed to the operational risks in business institutions.

Information to be gathered

The researcher will rely on asking questions from the respondents in the selected institutions and analyze it to find out if it is compatible. Most of the questions will be in questionnaire form (Alexander, 2003). The following will be the key questions:

Define operational risks in your institution and give five examples.
What are the effects of misunderstanding of traders on sophisticated financial model?
Give five components of operational risk and explain briefly on the possible long-term solutions.
What is linking-up of processes in business institutions and what are its benefits in solving the problem operational risks.
Do criminal acts against financial institutions regarding huge frauds in the United States involve employees?
How does incompetence of employees promote operational risk in institutions?

Identification of potential solution to the problem/preliminary research

According to (Brink, 2002), if a firm is dangerously dependent on particular key individuals as well as teams suffering high turnover of staff, the operational risks tend to be high. As a result, some institutions are indentifying such dependency and also monitoring areas for the risk indicators regarding such people. Preliminary research has revealed that, simple greed by employees is not the main factor in a fraud. Factors such as trading limits when it is exceeded by rogue traders can result to massive loss as the traders make efforts to gamble for break-even positions. Such traders will initially break the rules as they attempt to improve bonuses but the fear of being discovered as well as the consequences encourages them to opt for quits. Institutions should therefore increase their interests regarding psychology to influence risks as well as decision making.

(Marcus, 1998) argued that, modern trading can now be improved through electronic and information systems that can physically stop certain actions and automatically disclose infringements to managers of risks. This helps in making reliance on property more effective as opposed to reliance on people. However, managers must respond appropriately to real-time risk information received from the systems. This is because when a system is being used by people, there is always vulnerability of it being compromised by the same people who are entrusted to its use.

(Berger, 1999) found that, another challenge faced in using electronic systems to monitor operational risks is the difficulty that exists in their use when a firm is immature or during sudden increase in volumes. Financial business involving advisory services or third-party agents in sales are by their structure dependent on people who are experts and are therefore hard to engineer away. As a way of solving the problem, financial institutions should focus at individuals as well as group behavior to understand risks. Most researchers have concluded that, individuals break rules because of the corporate culture rooted in an institution that makes them escape consequences for their misconducts.

(Williams, 2003) suggested that, reducing operational risks in financial institutions requires a lot of patching up of key components both regarding the staff and core infrastructure in the management process. More focus should be on individual as well as human behavior to reduce the number of potential frauds done by the staff through the current technological advancement as well as through incompetence. Before a certain process is adopted critical analysis should be made on whether the firm is mature enough to accommodate it and if it would still remain stable when there are sudden increases in business volumes. These precautions would help much in reducing operational risk in banks and other financial institutions.

Research schedule

The project has been timetabled to cover three months at its broadest level and will be done in four phases to accommodate all the participants. Regarding the risk assessment, a certified letter of authorization will be obtained from every institution to be visited. This letter will be provided on request by concerned security personnel during every visit. However, all the concerned parities, even those who will be indirectly involved in the exercise will be informed in good time (Humphrey, 2000).

Research recommendation

The researcher has been authorized to carry out a research on operational risks in British Airways Company and related business institutions to investigate on the components of risks and recommend possible solutions.

Authorization

The research was authorized by the director in the department of research British Airways Mr. Nicolas.

References

Humphrey J. (2000): International Financial Markets: Elsevier Publishing Company pp. 43-51
Williams T. (2003): European Journal of Operational Research: Elsevier pp. 24-29
Brink G. (2002): Operational Risk: The New Challenge for Banks: Palgrave Macmillan pp. 19-25
Alexander C. (2003): Operational Risk: Regulation, Analysis and Management: Prentice Hall
Jackson H. (2004): Operational risk: Wiley Inter-science pp. 76-81
Berger A. (1999): Efficiency of financial institutions: Elsevier pp. 17-24
Santomero G. (2001): Management in Financial Institutions: CFA Institute pp. 56-62
Smith C. (2005): Managing Financial Risk: HarperCollins Publishers pp. 47-53
Marcus J. (1998): Fundamentals of Corporate Finance: McGraw-Hill Companies pp. 30-36
Titman S. (2002): Financial Markets and Corporate Strategy: Irwin Professional Publishing pp. 40-47

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