ABN’s Mulder calls for faster op risk implementation

Mulder said the banking industry had fallen behind other sectors in addressing operational risk concerns, and that while the Basel II capital accord has acted as a catalyst for financial institutions to get to grips with op risk, more emphasis should be placed on developing op risk procedures that improve a bank’s overall bottom line. Basel II will require banks to put aside capital for op risk for the first time in 2005 – a timetable that is likely to be delayed.

He used an analogy of crossing the street in Amsterdam or New York. “In Amsterdam I will just walk out and expect traffic to stop for me… in New York I wait for a green light, otherwise I know I will either be fined or killed,” said Mulder. He said the banking industry still treated op risk like crossing a road in Amsterdam and needed to change to a New York attitude.

One of ABN-Amro’s key management issues – called ‘smart objectives’ – this year is to put in place a number of operational risk systems and procedures. But Mulder said this did not go far enough: “[Risk management] is judged 60% by bottom line and we really need to bring the bottom line into our smart objectives for operational risk.” Mulder plans to place bottom line op risk objectives in ABN-Amro’s 2003 ‘smart objectives’, but did not state how this would be achieved.

Mulder also cautioned against placing too much reliance on op risk modelling techniques. “There are perception issues… how real is what you see?” queried Mulder. “It could be a case of the Emperor’s clothes.” The use of stochastical modelling techniques based on data in operational loss databases – a process commonly used in market and credit risk – is viewed as one important element in predicting future op risk exposures. But industry experts have cited concern regarding the reliability of data currently available. “Keep emphasising the qualitative as well,” cautioned Mulder.

He added that op risk should be seen as a senior management priority within an institution, and this should be conveyed to line managers through a ‘carrot-and-stick’ approach.

While people can also be viewed as an operational risk, Mulder cited the September 11 terrorist attacks in New York as an example where confidence in on-site staff to manage risks was crucial – ABN Amro’s head office could not offer guidance as telecommunications were severed. “Don’t concentrate your risks or manage your risks in one place,” said Mulder.