Michael Grimwade - Ten Laws of Operational Risk: Understanding its Behaviours to Improve its Management

1. Introduction
2. Chapter 1
3. Chapter 2
4. Chapter 3
5. Chapter 4
6. Chapter 5
7. Chapter 6
8. Chapter 7
9. Chapter 8
10. Chapter 9
11. Chapter 11
12. Chapter 12
13. Chapter 13
14. Chapter 16
15. Chapter 17

1. Introduction
2. Chapter 1
3. Chapter 2
4. Chapter 3
5. Chapter 4
6. Chapter 5
7. Chapter 6
8. Chapter 7
9. Chapter 8
10. Chapter 9
11. Chapter 10
12. Chapter 11
13. Chapter 12
14. Chapter 13
15. Chapter 14
16. Chapter 15
17. Chapter 16
18. Chapter 17
19. Part 2

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MICHAEL GRIMWADE

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Library of Congress Cataloging-in-Publication Data is Available:

ISBN 9781119841357 (Hardback)
ISBN 9781119841364 (ePDF)
ISBN 9781119841371 (ePub)

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To Karen, Charlotte and Olivia.

My thanks go to the management of ICBC Standard Bank for their ongoing encouragement and support.

I would also like to thank my friends and colleagues in the world of Operational Risk for helping me by reviewing drafts of this book, in particular Professor Elizabeth Sheedy, Dr Patrick McConnell, Dr Peter Mitic, Dr Ariane Chapelle, Dr Luke Carrivick, Dr Peter McCormack, Siraj Ahmed, Mia Pollock and Wayne McLaughlin.

MICHAEL GRIMWADE first worked on Operational Risk management during the early years of the profession in the mid-1990s, a decade before Basel II was finalised. He is Head of Operational Risk for ICBC Standard Bank and has previously held senior Operational Risk management roles at MUFG Securities, RBS and Lloyds TSB. Prior to this Michael was a management consultant with PwC and Deloitte Consulting, and he has also been a Director of the Institute of Operational Risk.

Michael has written a number of articles on the setting of appetite for Operational Risk; scenario analysis techniques; the quantification of emerging risks; how Climate Change may impact Operational Risk; and the modelling of Operational Risk capital. His book Managing Operational Risk: New Insights and Lessons Learnt was published in 2016. Michael received an award in 2014 from the Institute of Operational Risk for his contribution to the profession. He has a degree in Zoology from Oxford University and is a member of the ICAEW.

He lives in West London with his wife Karen and their two daughters, Charlotte and Olivia, and a very curious Bengal cat, called Milo. Any typos in this book are most likely caused by Milo's habit of walking across his keyboard.

The contents of this book are the Author's own views rather than those of ICBC Standard Bank.

Unlike credit and market risk, operational risk is lacking in basic theory as to why, where and when operational risk losses occur.

Dr Patrick McConnell

Operational Risk Executive, Academic and Author

You can know the name of a bird in all of the languages of the world, but when you're finished, you'll know absolutely nothing whatsoever about the bird so let's look at the bird and see what it's doing that's what counts.

Professor Richard P. Feynman

Winner of the Nobel Prize in Physics in 1965

Understanding Operational Risk is intuitively fundamental to its effective management. But a review of the profession's literature, regulations and training reveals that whilst there are many thousands of words on the subject of integrated frameworks for managing Operational Risk, specific behaviours and quantification, there is a lack of an overarching theory that might explain and predict its behaviour. This observation was made very clearly in a paper written by Dr Patrick McConnell, which opens with the statement that Unlike credit and market risk, operational risk is lacking in basic theory as to why, where and when operational risk losses occur (McConnell, ).

The challenge is that Market and Credit Risk are respectively defined as risks of losses arising from external events, i.e. the movement of market prices or the failure of a customer/counterparty to meet its obligations, whilst Operational Risk is primarily defined as losses arising from internal causal factors. In his brief paper McConnell proposes that Operational Risk losses arise when formal information channels are corrupted, interrupted or disrupted and that the scale of any losses can be linked to the quantum of data involved. In this book, I adopt a different approach, as I have set out Ten Laws of Operational Risk that describe how inadequacies or failures; business profiles; human and institutional behaviours and biases; and internal and external causes combine to result in events. The nature of the impacts drives both the rapidity and the scale of any resulting losses. Whilst this is different from McConnell's approach, his paper was both my inspiration for this book, and also influenced my ideas.