Define operational risk & its management, measurement methods and analysis of relationship of operational risk with commercial banks' performance in Pakistan

Abstract

Stringent corporate governance, regulatory standards and investor’s expectations are increasingly making operational risk management a focus for the banking industry. In view of the increasing competition within banking industry in respect of customer satisfaction and retention, corporate reputation and reward maximization, there is the need for banks to critically align business objectives with risk and control information to enhance operational performance, reduce cost in order to achieve the competitive advantage. This study focuses on operational risk management and competitive advantage in Pakistan’s banking industry with an objective of identifying the relevance of operational risk management practices in the industry and whether it can be a source of competitive advantage. Closed-ended questionnaires were administered to One hundred and sixty (160) respondents from eight selected banks. Findings indicated that operational risk effects are being realized and banks are now focusing more on devising a formal plan for managing operational risk, measuring it in order to implement required controls for key risk factors and are allocating the requisite resources for its mitigation specifically to leverage the losses arising from these operational risk events, as a tool for gaining competitive advantage. Some recommendations were made and prominent amongst them were that the Banks must link their operational risk management activities with their business objectives and identify the potential hurdles that can hinder their competiveness. Operational risk management is the responsibility of all staff members including the Board of Directors & management and as such awareness must be created on all levels as there is a need to identify, evaluate, monitor, control and report operational risk issues.