The topic being discussed in the guest lecture was operational risk. Mr. Taneja explained to the students the concept of operational risk using Basel Committee’s existing definition. It is basically the loss that is incurred due to failed internal processes, people, and systems or from external events. He also explained that individual banks can adopt their own definitions of operational risk if the minimum elements in the Committee’s definition are included. A key takeaway from the discussion was that operational risk is inevitable and cannot be zero.
Mr. Taneja briefly spoke about internal & external fraud, employee & workplace safety, clients, products and business practices, and process management. He emphasized the importance of operational risk indicators. These indicators are vital in identifying potential losses and tend to be specific to organizations. They refer to lagging/ex-post measures and information on events that have already taken place (examples include failed trades, settlement errors). It is up to the risk managers to transform lagging into leading indicators. This process can be carried out by changing the focus of the indicators or even by adding new information. Thus, the focus of these indicators could be changed to highlight issues that are still outstanding or remain open after a specified period of time. The transformation of these processes is difficult to implement in reality. He went on to explain three types of risks namely:
- Legal risk – It is included in operational risk. It refers to the risk of disruption to operations due to unenforceable contracts, lawsuits, adverse judgments and legal proceedings.
- Reputation risk – Although this type of risk isn’t usually considered, reputation risk is very critical to a business. It refers to negative public opinion. A fall in a company’s reputation can result in liquidity difficulties and falling share prices.
- Business or strategy risk – It arises from an adverse shift in the assumptions, goals and other features that underpin a strategy.
The next part of the lecture was about the latest trends and approaches. Mr. Taneja spoke of the relevance of frameworks, advanced analytics, strategic planning, stakeholder feedback, advanced management approach and the need to forecast “black swan” events. Post the discussion, Mr. Taneja answered questions which were along the lines of operational risk, risk management, and its applicability. He was able to explain the concept exceedingly well because he was able to relate it to real life examples in corporate organizations and financial institutions.