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WHY is Operational Risk so important?

THE IMPORTANCE OF OPERATIONAL RISK (OP RISK) TO A BUSINESS

For many businesses, Operational Risk is their # 1 Risk, and for all other businesses around the world including Global Financial Institutions and Corporates, Op Risk is one of their Top 3 Risks.

Chart showing the overlap between Operational Risk and other risks
Source: KPMG Business Dialogue, 23 May 2012


Why?

Many of the factors* that create Op Risk also create various other types of Risk. It is due to this common linkage between Op Risk and other types of Risk that creates a significant overlap (ie. strong correlations) between Op Risk and various other types of Risk to businesses. Op Risk is therefore at the core of any business operations.


Given the above, when Op Risk is managed correctly, the business enjoys a significant drop in its overall risk levels because material portions of other risks are hedged against automatically by virtue of managing Op Risk.

Learn more about Operational Risk in this post.

Sample list of Op Risk incidents

Company Loss Event Year
Lehman Brothers (U.S.) Bankruptcy 2008
Home Capital Group (Canada) Major Stock Drop 2017
Toshiba (Japan) Major M&A Loss 2016-2017
Parmalat (Europe) Bankruptcy 2003

In all of the above-mentioned cases, it was within the hands of Management and the Board of Directors of such companies to avoid such Loss Events. They were either (a) unaware of the importance of Op Risk and/or their ability to manage it; (b) aware but did not care or want to manage Op Risk; (c) aware but chose to hire inadequate service providers to manage their Op Risk; or (d) some other reason. In all cases, it was ultimately investors who lost money.

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