Managing Operational Risk ─ Practical Strategies to Identify and Mitigate Operational Risk Within Financial Institutions

Operational risk is the risk of loss from inadequate or failed internal processes, people, and systems or from external events. There are two types of operational risks: catastrophic and non-catastrophic. The vast majority of operational risks are non-catastrophic, i.e., low-loss events that institutions ably contend with every day. Catastrophic operational risks, however, can give rise to losses so extreme that they immediately put the survival of the institution at stake. This book explores the different types of operational risk that threaten financial institutions. After briefly discussing the non-catastrophic operational risks that existing literature adequately covers, the author focuses on practical due-diligence methodologies that institutions can use to identify less-familiar more-lethal catastrophic operational risks before they detonate. My core argument is that the mitigation and suppression of potentially catastrophic operational risks require an active, human capital intensive inspection program. This discussion of operational risks within regulatory agencies is the first of its kind.

Douglas Robertson is a senior financial economist at the Office of the Comptroller of the Currency, which is part of the United States Treasury Department. He conducts research on a broad range of topics related to banking and financial markets. Recent projects include a study of how investments in hedge funds and private equity funds affect the performance of public pension funds and cost-benefit analyses of recent changes to bank capital rules. Prior to his current position, he worked as an economist in the Office of Financial Institutions Policy at the Treasury Department and as a research associate at the Federal Reserve Bank of Philadelphia. Dr. Robertson received his PhD and MA in economics from the University of Maryland and his BA in economics from Grinnell College.