Crisis sparks op risk technology investment

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LONDON - Large financial firms are harnessing operational risk technology amid the current market turmoil to produce a more proactive management decision-making framework, according to a new report from Datamonitor. The report, 'From compliance to improved business performance through operational risk management (ORM)', says firms are moving away from the more traditional view of op risk as simply a compliance and risk-reporting function.

The study says operational performance benefits are increasingly being unlocked by leveraging op risk controls and reporting data - with a growing role for IT and automated reporting.

"Against the backdrop of well-publicised instances of fraud, wider systematic risks and compliance changes post-crisis, it is certain there will be more stringent reporting requirements," says Damian Shaw-Williams, financial services technology senior analyst at Datamonitor and the report's author.

A rise in prescriptive regulations and a shift within firms to place risk at the centre of business strategy are cited as reasons for the trend. This is connected with the realisation op risk can be used as the framework by which all other enterprise-wide market and credit risks can be managed.

"The necessity of testing extreme scenarios should now be obvious to all," says Shaw-Williams. "From the point of view of financial institutions, there will be a shift in focus from purely short-term profitability to demonstrating ongoing stability, by showing how today's requirements are being met, as well as tomorrow's, through extensive scenario testing and modelling."

Operational risk should be part of the overall management of each business function, not a separate reporting entity, according to the report. To embed op risk in the daily actions of everyone involved in business processes, there should be increased integration between operational risk and operations staff.

"In response to shrinking margins, business process efficiencies will come to the fore as firms seek the per-unit cost reductions available through streamlined processes and industrialising scale," says Shaw-Williams. "Meanwhile, responding to any changes in regulatory regimes will be an opportunity for far-sighted companies to take a fresh look both at risk management and operational process."