Operational Risk Control Techniques

Question 1

What are the 5 fundamental steps to controlling operational risk?

Answer 1

1. Identification
2. Assessment
3. Measurement
4. Mitigation and Control
5. Monitoring and Reporting

Question 2

What are some of the techniques used to control operational risk?

Answer 2

1. Audit - bottom up
2. Critical self assessment - bottom up
3. Risk mapping - map process flows across organisation and their links to operational risk. Help management understand the location of operational weakness - bottom up approach.
4. Causal networks - map the factors that directly or indirectly cause an operational risk even - bottom up
5. Key Risk Indicators - measures which change over time and indicate how risky an activity is by applying objective statistical methods - bottom up and top down
6. Actuarial model - focus on frequency and magnitude of operational risk losses based on internally and externally sourced data. - top down and bottom up
7. Earnings volatility - Earning of various operational units are analysed and historical changes in the earnings are calculated. Assumes earnings reflect operational risk events and not changes in business environment - top down approach.