The reason it has been segmented this way is most likely due to BIS wanting to encourage financial institutions to establish a credible quantification framework and a solid operational risk management infrastructure into play before introducing more complex risk scalars. All good in concept but that then leaves the organisation to set about clearly defining what constitutes an operational event and that will require the institution to highlight the nature of strategic causes so that they can be put aside for consideration at a later date.
A recent debate with a colleague from a large Australian insurance company attested to such a problem.
---> Really what is the definition of strategic risk?
and
---> Is a poor strategy an operational event of the finance or planning department?
He has raised some good points here and the market risk section of Pillar-I can`t exist unless such boundaries are drawn; which they are in Pillar-I.
Clearly documented trading strategy for the position/instrument of portfolios, approved by senior management which would include expected holding horizon” and “dealers have the autonomy to enter into/manage the position within agreed limits and according to the agreed strategy
Operational risk on the other hand doesn`t make mention to such clear divisions, yet such segregation policies are paramount to establish if the bank is going to align losses accurately in a transparent taxonomical structure. If that fails then these loss repositories will be imbued with nebulous data points, all of which are difficult to statistically interpolate, particularly if opinion changes next financial year.
+ On with Pillar II and Strategic Risk
So onto Pillar II, this makes a good 17 references to strategic risk; from the strategy of holding capital itself which is in bold might I add, to “The analysis of a bank`s current and future capital requirements in relation to its strategic objectives”
One of the foundational problems with measuring anything though is starting out with a clear definition. The good old statement that everyone seems to throw around like loose change in a café “one has to measure what they manage and define what they measure”, might just be applicable here even though I generally avoid regurgitating overused paraphernalia however, if you pop out and search the web for a good definition you’ll enter a dungeon of burgeoning risk analysts all lobbying a concept that seems to suit their agenda.
A good place to begin and perhaps finish with is the TOWS matrix. At least it commences its piece by explaining the Greek origins of strategy, it does though move onto a process that could be effective in planning strategy and I certainly recommend having a peep by following this link:
TOWS
What I find appealing with the TOWS Matrix is that it offers a process for capturing alternative strategies along with internal weaknesses and strengths. This is very important because that levels how management should decide strategy. Really any risk decision is based on the following criteria: a good understanding of ones ability for success, what drives that success, the alternatives and an appetite for risk/aversion in the current environment.
The TOWS matrix also draws a line between tactical failure and strategic failure for they are very different beasts. Tactical failure of course has a closer proximity to operational risk than a poor steering choice, so now all one has to do is understand whether the inability to mobilize a good tactical team or understand what environment they operate best in belongs to poor strategy or an operational event.
