Moody’s to give more weight to operational risk when rating banks

Moody’s Investors Service will focus more on operational risks when rating banks, the rating agency said today.

“The evaluation of operational risk in banks is becoming a more important element of the analytical process, especially since recent institutional problems have demonstrated the need for more responsive approaches to risk management,” said Moody’s.

Moody’s London-based bank operational risk analyst Brendon Young said he could not comment explicitly on what the agency regarded as “recent institutional problems” for client confidentiality reasons. But he added that the problems broadly relate to questions of corporate governance and general accounting issues.

“The combined impact of the forthcoming Basel Capital Accord and European Union legislation has significantly increased awareness of operational risk,” added Young. “Moody’s analytical approach to bank operational risk is not confined to a judgement of a management's skills.”

Moody’s said that when evaluating banks’ operational risk, its analysts will take account of the overall risk profile of the bank, how the bank’s main risks affect its profitability and stability of earnings, the optimisation of the risk-reward relationship and other underlying factors.

“Since operational risk will affect credit ratings, share prices and organisational reputation, analysts will increasingly include it in their assessment of the management, their strategy and the expected long-term performance of the business,” said Moody’s.