Operational Risk Management: A Survey of Systems, Strategies and Preparedness of Indian Banks

Abstract

The year 2008 would definitely be etched in history as the year of shut downs, layoffs, bailouts, bankruptcies, frauds, mis-selling, rogue trading, poor internal controls. The global financial services sector experienced the worst imaginable times during 2008. Many of the world's mature banking systems failed and were the recipient of government rescue funds. The year witnessed the collapse and near collapse of some of the largest and most diversified financial institutions in the world. A range of explanations emerged as the root cause of the financial meltdown. Greed, increasing complexity of banking & financial products, major advances in technology, rapid expansion of bank operations, increasing vulnerability of financial institutions, poor modeling were amongst the causes of this meltdown. All these causes have a striking resemblance with Operational Risk events. It is observed that failure in Operational Rjsk Management (ORM) by the financial institutions fuelled the subsequent Credit & Liquidity Crisis and the Financial Meltdown, which engulfed the world in the closing months of 2008. The root cause of the problem was not the "new " or so-called "unknown risks" from Derivatives, Collateralized Debt Obligations; rather it was the failure of managing Operational Risk.