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Who should attend
This program is relevant to regulatory and compliance executives and risk management executives. Operational Risk teams, Enterprise Risk Management teams, Basel teams, and Audit Teams with focus on Operational Risk will also find it beneficial.
About the course
Operational risk is a growing concern for many firms. With an increase in regulation, business complexity, the role of critical processes and systems, and the new wave of emerging technologies, operational risk will continue to grow in scale and significance for many firms. In this class, we will examine the features that make operational risk measurement challenging. We will review best practices for managing operational risk with special emphasis on its prevention and control and how leadership of the function can best be undertaken. The material is presented through real-life case studies, allowing us to explore how operational risk is handled by organizations and how failure to contain it can often lead to regulation and reputational harm.
The focus will be on the importance of operational risk in the financial services industry and the development of organizational capabilities to address it, including the communication of operational risk metrics, such as Key Risk Indicators (KRIs). We will review in detail the Basel methodologies for calculating economic capital for operational risk and examine advanced tools for operational risk preparation, including stress testing and scenario analysis. We will also examine operational risk in the context of an Enterprise Risk Management (ERM) framework. This course also presents how teams make decisions about operational risk and how the organizational culture impacts risk reporting, operational risk management, and the strategy of firms.
How you will benefit
- Learn best practices for managing operational risk
- Understand the metrics and methodologies for operational risk measurement
- Know how to lead operational risk teams
- Understand operational risk and Enterprise Risk Management (ERM) framework
- Learn more about linkages between operational risk, regulation, and brand harm
Introduction to Operational Risk in Financial Services
This session will review the definition, source and nature of operational risk in financial services, with emphasis on banking and insurance firms. The differences from credit and market risk with be stressed and the challenges in detection of operational risk examined.
- Discuss actual case example of operational risk and its challenges for management
- Focus on the non-transferability of operational risk
- Examine operational risk in banking and insurance
Detection and Measurement of Operational Risk – Key Risk Indicators and Focus on Variance
Research by leading authorities shows that operational risk is highest when firms are confronted with complexity, novelty, and scale in business products and processes. This session will examine the need to leverage novel measurement, such as Key Risk Indicators (KRIs) for the communication of operational risk in critical business processes.
- Discuss how KRIs are used for operational risk detection
- Emphasize importance of key processes in financial services, such as customer interactions
- Introduce KRIs for operational risk measurement and process improvement
Making Risk-Based Decisions in Teams – Operational Risk and Business Strategy at Work
Through a real-life case and simulation, we will examine how individuals process risk-based information and how teams further react to risk-based information in the context of a business strategy question. The simulation will allow us to explore overcoming organizational challenges, such as risk aversion, reporting biases, and organizational focus.
- Review case study and perform simulation of risk-based decision making
- Identify operational risk-taking embedded in business strategy decisions
- Emphasize importance of information in operational risk framing
Economic Capital Methodologies for Operational Risk – Basel Models and Modeling Requirements
This session will review the prevailing Basel II and III methodologies for operational risk economic capital enumeration. As these approaches also call into question the role of internal/external data and the integration of self-reporting, we will examine these and other process requirements under the Basel methodologies.
- Review Basel II & III Operational Risk Requirements
- Examine Basic and Standardized Basel approaches
- Examine in detail Advanced Measurement Approach (AMA), with emphasis on process and data requirements
- Show how to leverage historical, internal, and external data in operational risk models
- Discuss fat-tail analysis, extreme values, and the role of statistical models
- Discuss the development of operational loss databases
- Share best practices for levering IT, legal, audit, and operations for risk prevention
Monte Carlo Simulation, Stress Testing, Scenario Analysis, and Advanced Modeling
This session will examine the use of Monte Carlo simulation, stress testing, and scenario analysis to develop “what if” models for operational loss. We will review best practices in scenario analysis and the use of teams and experts in developing useful scenarios.
- Monte Carlo simulation models for operational risk
- Stress Testing
- Scenario analysis
- Scenario development with experts and teams
- Leveraging scenario analysis for process improvement
The Role of Operational Risk in Enterprise Risk and the Importance of Impacts of Operational Risk to Customers
In this session, we will study the importance of operational risk in an overall enterprise risk management framework. Through a real-life case, we will dissect the impact that operational risk can have on customers and how operational risk, when left unchecked, leads to greater regulatory risk and reputational harm.
- Understand and identify how operational risks can lead to regulation, brand attacks, and reputational harm
- Examine critical customer experiences and the systems that support these, such as critical IT systems
- Review the implicit expectations of customers in customer-facing operations and impact to operational risk
- Discuss operational risk as it relates to legacy product businesses
Managing Operational Risk in Practice – Governance, Oversight, and Leadership
In this session, we examine how major operational risk impact customers and lead to punitive regulation and damaging reputational harm. In this manner, the role of the corporate leaders, the metrics for operational risk detection and prevention, and the importance of an enterprise risk framework that includes operational risk are greatly elevated in importance. The role of business leaders in responding to operational loss events and crises are examined through two real-life cases in which operational risk challenged the firm’s strategy and ability to operate.
- Show the role of leaders in managing operational risk crises
- Demonstrate the role of operational risk in regulation
- Share leadership best practices in communicating and reacting to major operational risk events
- Examine operational risk in the context of an enterprise risk management (ERM) framework
Getting Started with Operational Risk: The Path from Measurement to Management to Prevention
In this session, we will review action items and best practices for firms seeking to advance operational risk management capabilities. Special emphasis will be given to developing a path for advancement of capabilities, with the goal being operational risk prevention. We will examine opportunities for increased operational risk awareness, the development of operational loss data, and organizational best practices for managing the systems and processes that generate operational risk. Trends in operational risk management in scale and activities will be covered.
- Show economic capital trends and norms for operational risk in banking and insurance
- Provide overview of operational risk research: findings on size and types of operational risk by industry and region
- Share best practices in operational risk
- Demonstrate integration of audit and legal functions in operational risk management
- Describe how to change culture and language on operational risk in your teams and organization
Russell Walker, Ph.D. is Clinical Professor at the Kellogg School of Management. Dr. Walker has expertise in Big Data and Analytics, Risk Management, and International Business Strategy. He has developed and taught leading executive programs and MBA classes on Big Data and Analytics, Strategic Da...
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