Linkage between op risk measurement and management key, says Lawrence

Operational risk managers must face up to how they directly link op risk measurement to the process of op risk management, said Mark Lawrence, chief risk officer at ANZ Bank in Australia, today at the annual Operational Risk conference in London.

Lawrence, who delivered the keynote address, repeatedly underscored the differences between traditional risk management disciplines such as credit and market risk, and the challenges of operational risk. "The difference with operational risk is this rather awkward and troubling dependence upon what we describe commonly as internal controls – people," he said. "People are somehow at the heart of this operational risk process and you only have to look at the Allied Irish [Banks] experience a little more than a year ago and read the Ludwig report, which was distributed to the market – it was an 80-page or so litany of control failures leading to a $700 million loss – to understand that these control failures were really about either the absence of a policy or a control. Or, in most cases, human beings that were supposed to be doing something, not doing what they were supposed to be."

Lawrence said these factors demonstrated the difficulty of measuring operational risk. “It really is different from credit and market risk because there is this dependence on the quality of internal controls: are they there, are they robust, do they work? If they break down, how bad could the consequences be?" he queried.

Lawrence said ANZ had used the report to conduct an internal review by distilling down a dozen or so control failures, and assessing whether or not the bank also had the potential to experience those kinds of failures. "We took the results of that review to our board," he said. But, concluded Lawrence, the ultimate success or failure of the various methods proposed for measuring operational risk capital today will be determined by the strength of their connection to the operational risk management process. "This is the holy grail, the pot at the end of the rainbow,” Lawrence said.