Risk management specialists and banking regulators attending a conference sponsored by the Banking Administration Institute last week sent a clear message about measuring operational risk: The whole concept is very unclear.
"I get real squishy feelings about operational risk," said Jonathan M. Boylan, a senior vice president with KeyCorp. "I don't know what it is sometimes."
"I have never seen a good definition of operational risk," said Kurt Wilhelm, a national bank examiner with the Office of the Comptroller of the Currency.
Asked if Fleet Boston had come up with a way to allocate economic capital for operational risk, vice chairman David L. Eyles responded, "We're trying."
Defined differently by different people, operational risk at its broadest is the danger posed by potential disruptions in service and the resulting damage to reputation because of internal control failures, failure of information processing equipment, malicious or fraudulent actions by individuals, and other unpredictable events.
Mr. Wilhelm said risk management pioneers like the former Bankers Trust (acquired this year by Deutsche Bank) that have studied operational risk have discovered that allowances for it "consume a tremendous amount of their economic capital."
Operational Risk Inc., which was spun off in June from Bankers Trust, sells a commercial product based on the BT system, called Operational Risk Control and Analysis.
The New York-based vendor's chief executive officer, Douglas Hoffman, is former director of operational risk for Bankers Trust, whose Operational Risk-Adjusted Return on Capital system he developed.
Mr. Hoffman said the system required the creation of two databases -- one logging the bank's historical incidence of operations-related loss and one tracking industrywide operations losses. Actuarial analysis of the databases, he explained, is used to calculate estimated future losses.
He said banks that use the system in assessing their economic capital needs find that the amount attributable to operational risk ranges from 15% to 30%.
-- Rob Garver