Operational Risk in Four Letters

Ariane Chapelle

Sometimes it’s good to go back to basics. Every operational risk manager knows the Basel Committee on Banking Supervision’s definition of op risk: “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” That’s PPSE for short.

After 15 years of frameworks, lines of defence, risk and control self-assessments, aggregated dashboards and tools of every kind, risk managers in the financial services industry would benefit from going back to the fundamentals of op risk: what it really is and how it is generated.

I would argue that organisations that get the fundamental performance drivers of PPSE right are much less prone to large operational failures than others. Firms that dedicate enough care to the performance management of PPSE components mitigate – implicitly or explicitly – the key factors of operational risk and achieve operational excellence.

Table 1.1 presents some of the biggest drivers of operational performance using a PPSE approach. It also highlights the relevant areas of scientific research, which is still underused in the financial services sector.

A PPSE view of op risk management has different