Banks are ill-equipped to meet regulatory edicts for better policing of internal operations, a consultant said.
Most financial institutions take a patchwork approach to monitoring against rogue trading, fraud, mismanagement, and even natural disasters, said Ali Samad-Khan, principal consultant with PricewaterhouseCoopers.
That leaves banks vulnerable to millions of dollars of losses stemming from deceptive employees, faulty operations, and bruised reputations, Mr. Samad-Khan said.
The Office of the Comptroller of the Currency is telling banks to step up their policing of internal operations to ward against blow-ups. Examiners will be looking at how banks monitor, protect against, and handle problems that crop up.
The problems can range from deceptive sales practices to human error and are becoming more prevalent as the banking industry becomes more sophisticated, Mr. Samad-Khan said.
His said his firm, the result of the recent merger of the accounting giants Price Waterhouse and Coopers & Lybrand, is among the first to offer banks specific systems to mitigate operational risk.
The PricewaterhouseCoopers system includes a review of each business unit in a bank to determines its risks-legal, strategic, or transaction- related.
The risks are scored, with weighting assigned to the areas judged most vulnerable. For instance, the review could lead a trading area to step up oversight of technology systems or a trust department to strengthen anti- fraud systems, Mr. Samad-Khan said.
After the initial assessment is complete and changes made, banks would receive regular updates for each unit to show whether it is up to standard or showing signs of slipping.
For the most part bankers agree that internal controls can stand some beefing up. But they are not completely sold on the consultant's approach.
"It's very theoretical," said Sohrab Zargham, vice president and chief auditor at Harris Trust and Savings Bank. "The system would be hard to finance, especially when the demand is for capital to be put to income- producing uses."
Another banker, who asked not to be named, wondered about "the collusion factor"-employees feeding a system incorrect data to cover their misdeeds.
Mr. Samad-Khan said banks would have to take steps to ensure that data are accurate. He also said that though no bank has signed for the system, some have shown interest.
