Operational Risk Framework Benefit Collection

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Operational Risk Framework Benefit Collection
Jeremy Quick Head of Operational Risk
Framework Lloyds TSB Group 20th February 2007
The views expressed in this presentation are my
own and do not necessarily represent the views or
policy of my employer, Lloyds TSB Bank plc.
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Why collect Framework Benefits?

• Payback time on infrastructure investment.
• Highlights gaps around tools or businesses.
• Helps with the regulatory use test.
• Cross-Group learning.
• Good for buy-in, especially in senior management
  presentations.
• Helps turn risk into a commercial discipline.
• Why wouldnt you collect benefits but how many
  people are systematically doing this?

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What is a Framework Benefit?

• We try to avoid generalisations, i.e. increased
  understanding of Operational Risk.
• Something of tangible business advantage that can
  be ascribed to the activities of Operational Risk
  staff or Risk Owners.
• Something that would not have happened without
  the existence of an Operational Risk Framework.
• Something that cannot be ascribed to
  long-established approaches to Operational Risk,
  (e.g. anti-fraud IT programmes).
• Should fit with the SMART approach, (Specific,
  Measurable, Achievable, Realistic, Timely)
• Should ideally be quantifiable, (e.g. FTE
  reduction, simpler processes, leads to higher
  earnings, closing down large loss possibilities).

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Framework Pyramid
AMA
Fixing Group-Wide Strategy, Industry Change
Group
5
Group-Wide Efficiencies, Appetites, Shifting
Resources
AMA
4
TSA
Aggregation, Models
3
BU
Local Efficiency Gains, Internal Losses,
Forward-Looking
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BIA
Mapping, Control Self-Assessment, Heat Maps
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We should expect lots of small benefits with
really big but fewer benefits as we reach the top
of the pyramid.
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Level 1
Mapping, Control Self-Assessment, Heat Maps
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Level 2
Local Efficiency Gains, Internal Losses,
Forward-Looking
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Level 3
Aggregation, Models
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Level 4
Group-Wide Efficiencies, Appetites, Shifting
Resources
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Level 5
Fixing Group-Wide Strategy, Industry Change
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How to Capture and Sustain Benefits
Dont get transfixed with precise quantification.
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Framework Pyramid Our Experience
Fixing Group-Wide Strategy, Industry Change
0
5
Group-Wide Efficiencies, Appetites, Shifting
Resources
14
4
12
Aggregation, Models
3
Local Efficiency Gains, Internal Losses,
Forward-Looking
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2
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Mapping, Control Self-Assessment, Heat Maps
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Our experience reflects what the pyramid would
suggest.
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Value of Benefits
Benefits can either accentuate positives or
reduce negatives.
Benefits that are reducing negatives
Reducing Losses
Reduce Costs
Reduce Wastage
Benefits that are accentuating positives
New Business
Quantification can highlight earnings growth as
much as cost limitation.
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Benefits by Risk Category
Risk Category
Other
Customer Treatment
Legal Regulatory
Process Resource
Theft, Fraud Other Criminal Acts
People Risk
Change Related Risk
Number of Benefits
Why is the framework better in some areas than
others?
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Benefits by Division
2006
2005
Why are some parts of the Group getting more out
of the framework than others?
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Benefits by OR Framework Tool
Indicators
Loss Data
Self-Assessment
Other
Model
Reporting
Scenarios
Why are some tools more effective than others or
is this just a matter of embedding?
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Areas for future Benefits

• Risks in Plan. Influencing the Plan before the
  Risk Assessment.
• Group-wide Alignment.
• Appetites Linking the Model with behaviour.

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Conclusions

• Useful to collect benefits.
• Says much about the business ability of the
  Operational Risk framework.
• Says much about embedding.
• Its difficult to encourage reporting but it can
  snowball.
• The concepts are not new.
• The ideas are very simple and easy to grasp.