Transcript

Meeyeon (00:14)
Hi everyone and welcome back to another episode of What’s New at CFI. What’s New at CFI might be me right now because I’ve been away on mat leave. My name is Meeyeon Park. I’m a VP of Content and Training here at CFI, and today, we are sitting here with Ryan, who we all know and love. Ryan, how’s it going?

Ryan (00:36)
Doing really well, Meeyeon, and it’s delightful to have you back after being away for a year on your mat leave.

Meeyeon (00:42)
I know I just barely survived, just barely. But we have tons of new stuff at CFI. And today we’re going be talking about operational risk management at banks. Super excited to talk about this is always very topical for anyone that’s interested in finance. And we just jump right into it.

Ryan (00:46)
Why don’t I tell you about what operational risk actually is, because sometimes, it’s not quite as easy to define as something like credit risk or market risk. So operational risk has a fairly well-defined definition, and it’s the risk of loss resulting from an inadequate or failed internal process, people, systems, or external events.

So that kind of means that these, these four dimensions to operational risk. The first is people. So these are the risks that are associated with either human error or maybe something like internal fraud. The second part is processes. So banks and organizations rely on lots of different processes and sometimes those processes break down and fail. So, operational risk captures those failures in internal processes.

The next one is systems, I think that we mentioned. So particularly, banks where we’ve had this massive leap forward over the last couple of decades in terms of technology, operational risk also captures things like IT failures, cybersecurity risks, or any kind of system malfunction. And then the fourth one, I beg your pardon, is external events. So operational risk

captures things like natural disasters, earthquakes, or tropical cyclones that might close a bank branch or a trading floor down. Global pandemics, which impacts, as we saw in COVID-19, the way that banks are able to run their operations. So, operational risk has these four dimensions. And so unlike financial risks, and when we say financial risks, we’re really talking about things like market risk, liquidity risk, credit risk,

operational risk comes from within the organization or due to external factors which are unrelated to financial markets.

Meeyeon (03:05)
And that’s super clear. coming into this, I know what operational is quite generally, but like that was a very succinct way to talk about what operational risk is and how it actually differs from the other types of risk faced by banks, because banks face up numerous numbers of risk that we have to kind of differentiate and understand to understand the bank and how it functions well.

Ryan (03:29)
For sure.

Meeyeon (03:30)
Another thing that I wanted to talk about was, so how do you think that operational risk and its management within a bank differ from say, operational risk at a general corporation like P &G, Tesla, any household names that we’re familiar with?

Ryan (03:49)
That really gets to the crux of the problem, Leon. And banks operate in a really tightly regulated industry, and rightly so. So all organizations, and I think you mentioned companies like Tesla, for example. All organizations, CFI, for example, we all face operational risk. We can all be impacted by failures in people, processes, systems, or external events. But the key difference really is the regulatory environment that banks operate in.

So, the global banking regulators have actually seen how impactful operational risk can be on banks. And just like market risk, just like credit risk and just like liquidity risk, global regulators, and I’m talking specifically about the Basel framework, which is the global regulatory framework that most countries base their banking regulatory frameworks on. The Basel framework actually stipulates

how banks and other financial institutions should manage, mitigate, and focus on operational risk. So, the key difference is there’s a regulatory imperative for banks to manage operational risk in a specific way. So, one thing that I think is quite useful for our listeners to know is that a major focus of this course is we focus on the seven different types of operational risk categories that are defined by the Basel framework. And, we also give

real-life examples of where banks and other financial institutions have failed to meet the requirements of these seven operational risk categories.

Meeyeon (05:29)
Given everything that we’ve talked about, we are getting a clear understanding at this point that it is a major important risk. But is operational risk a major risk faced by banks as they compare to their other types of risks that they face? Because they do face so many.

Ryan (05:44)
They do face a lot of different risks. Operational risk is a really major risk faced by banks. In fact, if you look at, if you follow financial media like the Financial Times or the Wall Street Journal, Bloomberg, Reuters, whatever, and you see banks getting fined by global regulators, chances are they’ve been fined due to failures not in their market risk management,

not in their liquidity risk management, not in their credit risk management. Chances are they’ve been fined due to failures in the operational risk management. So operational risk is a major, major source of risk for banks. And this has only really increased over the last couple of decades or so as technology and growing regulatory pressures and just the sheer complexity of banking operations have grown.

So banks have faced really major fines over the last 10, 20 years due to various failures and operational risk. And if you think of any well-known financial organization, and I won’t name specific banks in this podcast because it wouldn’t be fair, but if you think of a well-known global bank or a well-known global financial institution, chances are sometime in the last 10 years,

they’ve faced a multi-million dollar fine due to failures in the operational risk management.

Meeyeon (07:16)
And we won’t name any names here, but I think we could rattle off a couple. They’re always, these types of events are generally headline-making news. And so if anyone who’s listening has ever been a little bit more curious to understand what was going on in those headlines that we’ve seen, again, not naming any names, this is going to be a course that’s going to help you really understand what those problems are, what operational risk is, how it’s different,

and why it is so important. And so, if you’re interested in learning more about operational risk banks, this is going to be the course for you.

Thanks, Ryan, for such a detailed synopsis of what operational risk management is at banks. I’m so glad you visited us and I can’t wait for you to visit us again when you have another course.

Ryan (08:08)
We’ve got some really great courses coming up over the next little while, so I’ll be very happy to come back and have a chat with you about them.

Meeyeon (08:14)
Yeah, see you soon.