Operational Resiliency

Operational Resiliency – A Defence Mechanism for the BFSI Ecosystem

“Self-Defence is Nature’s Eldest Law.” An adage that applies predominantly to individuals, in wartactics, and in sports strategies. Today, this adage is applicable across industries as disruptions are inevitable and potentially severe, and it is the prime purview of businesses to grasp the extent of damage and have structured contingency plans to reduce the impact.

In the event of a crisis, Operational Resiliency becomes the self-defence key against the burgeoning negative factors stemming from the domino effects of unmitigated disruptions.

Thereby, resilience can be seen as the ability of organizations to anticipate, prevent and adapt to the rapidly evolving environment and continually channelize their growth in step with the disruptive risks subjected on them. How creatively and strategically can organizations design solutions to provide critical business services in the advent of a disruption? The fundamental here for corporates, is to learn to bend but not break.

Today, keeping the volatile nature of COVID-19 in mind, the world has witnessed a sudden surge in economic isolationism, military disruptions and trade conflicts. Never has it been more paramount to mitigate malicious operational, financial and technological risks and calculatedly converge these three areas into high functioning and optimum output producing units within a safe industrial cocoon on the pillars of operational resiliency.

Thereby, resilience can be seen as the ability of organizations to anticipate, prevent and adapt to the rapidly evolving environment and continually channelize their growth in step with the disruptive risks subjected on them. How creatively and strategically can organizations design solutions to provide critical business services in the advent of a disruption? The fundamental here for corporates, is to learn to bend but not break.

Today, keeping the volatile nature of COVID-19 in mind, the world has witnessed a sudden surge in economic isolationism, military disruptions and trade conflicts. Never has it been more paramount to mitigate malicious operational, financial and technological risks and calculatedly converge these three areas into high functioning and optimum output producing units within a safe industrial cocoon on the pillars of operational resiliency.

How deep an impact has COVID 19 had on industry operational risk perspective?

COVID-19 has unerringly integrated its tenacity within the Banking, Financial Services and Insurance (BFSI) web, compelling them to restructure, reconfigured and reposition their services, processes, systems and objectives. In the way of a silver lining, it has provided BFSIs with a platform to transform operations and reimagine corporate performance metrics to continue serving their customers and clients, upholding the same deliverable standards, if not better. Innovative and sustaining operating models have been designed ad hoc to withstand such disruptions and precipitate maximized business values and synergetic productivity.

In the event of a disruption, banks internal risk management must focus on;

  • Identifying systemic risks,
  • Measuring and assessing exposures to those risks,
  • Monitoring the exposures,
  • Monitoring and aligning capital needs on a requirement basis,
  • Ensuring steps taken to control or/and mitigate exposures
  • Gathering leadership insights on the bank’s vulnerable risk systems and capital positions.

Nevertheless, Numerous studies indicate a significant change in the comprehensive operational risk profile across the BFSI sector in a short span of time since the onset of COVID -19;

  • Most pronounced risk in such tumultuous terrain is attributed to Business Continuity, which highlights the immediate need for regulatory intervention to help strengthen the operational resiliency guidelines in banks,
  • Over reliance on third party collaborations is vetted as a significant risk driver since operational resiliency practices could turn out to be disputable and unverified in the long run due to exposure of their critical processes,
  • There is a potential surge in fraud practices due to the over-all macroeconomic decline and fear exploitation of the pandemic.

What is the path towards being operationally resilient?

What groundwork has been done to make the BFSI sector more resilient?

The Basel Committee of Banking Supervisors (BCBS), on August 06, 2020, released a consultative document on the ‘Principles for Operational Resilience’ (POR). Since the financial crisis of 2008, numerous reforms in line with the uniqueness of a crisis, have been crafted into the originally stipulated POR document of 2003, to strengthen banking operational risk practices.

Consequently, with the outbreak of the novel coronavirus, there is a stringent need to address the viability of banking stress techniques to absorb potential shocks and draw on the previously issued principles to better equip banks with sound risk management frameworks that test positive against newer hazards. BCBS undertook a review of the principles in 2014 that majorly looked into;

  • Assessment of implementation of principles within banking framework
  • Significant implementation gap identification
  • Emphasize on emerging operational risks that were not categorized

Conclusively, sufficient implementation of several principles was not met and further guidance was required to enable optimum functionality of these principles. Whilst the current POR does not provide provisional principles for COVID19, it highlights the recommendation of the 2014 review and asks banks to re-examine and re-calibrate their operationalrisk process shortcomings as per the POR guidelines to better withstand the negative tidings of subsequent pandemics, cyber-attacks, technological disruptions or natural calamities. The consultation document awaits the Basel committees’ comments by 06 November 2020 to perhaps reiterate some principles and incorporate additional insights based on the cascading macroeconomic scenario that endanger the risk management pillars of banking systems.

The August 2020 revisions draft on the Principles for the sound management of operational risk of BCBS has curated 12 principles to strengthen operational resiliency through effective operational risk management. The principles are fundamentally focused towards 3 main entities that will provide prudent measures for business continuity;

  • Board of directors/Leadership CXO’s
  • Senior Management
  • Banking frameworks

Three principles attribute utmost importance to the association of board of directors with the banking ops framework in establishing a strong risk averse culture, ethics training, provide employee incentives to be conversant with risk management mandates. They are also advised to oversee the material operational risks, effectiveness of key controls, and ensure implementation of the policies, processes and systems of the risk frameworks are meted by senior management effectively. The leadership must periodically review the risk appetite and disruption absorption levels that the banks can withstand.

Four principles are aimed at the effective risk mitigation at senior management level where they are advised to draw up, implement and maintain transparent, and robust governance structure with consistent lines of responsibility with the approval of the board. They should have a comprehensive understanding what operational risks signify and be able to correctly identify, assess and regularly monitor inherent risks and exposures that may affect the banks internal processes. The remaining five principles are incorporated as a support base for banks to carry forward their operational risk plans in the event of disasters and disruptions. They widely address the imminent requirement of banks to develop, implement and maintain operational risk frameworks based individually on their nature, complexity, size and risk profile, effective business continuity plans to limit losses during crisis and allowing stakeholders to assess its approach to operational risk management and its operational risk exposure.

Going Forward?

Based on the previous revisions, the expected November comments and the subsequent newly revised principles imbibing the disruptive impact of COVID-19, banks will be potentially well equipped to either design, implement and integrate the POR either on their own capital capabilities or collaborate with third parties, to gain momentum on being resilient to further aftershocks brought on by the novel coronavirus.

Banks must reconsider aligning their risk mitigation strategies based on their individually capacity to bear the nominal costs of setting up critical and risk tolerance structures to achieve higher operational perseverance. Although there is yet time for the Basel committee to introduce COVID19 conformed principles, banks must work towards being POR compliant for the established 12 principles, as per their risk profile and critical response time assessments.

Banks must reconsider aligning their risk mitigation strategies based on their individually capacity to bear the nominal costs of setting up critical and risk tolerance structures to achieve higher operational perseverance. Although there is yet time for the Basel committee to introduce COVID19 conformed principles, banks must work towards being POR compliant for the established 12 principles, as per their risk profile and critical response time assessments.

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