Source: ISACA Journal
Quote from Introduction:
“While many lessons were learned from the 2007 global financial crisis, the Basel Committee on Banking Supervision identifies as one of the most significant the fact that the IT and data architectures used by banks were inadequate to support comprehensive management of financial risk. Many banks lacked the ability to aggregate risk exposures and identify concentrations quickly and accurately at the bank group level, across business lines or between legal entities. Some banks were unable to manage risk properly because of weak risk data aggregation capabilities and risk reporting practices. These weaknesses had severe consequences for banks and for the stability of the financial system as a whole.”
Quote from conclusion:
“The cost accounting process of value creation, coordinated by the CFO, should lead to forward looking provisioning scenarios. Models are used to predict the capital buffers that the organization needs to cover its own operational risk. The CFO is assisted in this activity by financial analysts or actuaries who use stochastic analysis, a technical indicator normally used in the stock market, to represent the distribution of chance and manage uncertainty. The analyst is responsible for calculations and not for approval.
Contrary to market risk, operational risk management is, therefore, not based, as was believed until the subprime crisis, on the decision-making tool or stochastic calculus used by the actuary. A decision making system does not replace the operational systems that are in daily use by the company, in particular, in management accounting, cost accounting or business accounting. A decision making platform is the key element for the analysis, the simulation and the optimization of the performance of the company. But its efficiency and the reduction of its margin of error depend on the capacity of the cost accounting tool to feed in the forward-looking analysis using the current and historic real data of operational risk of the company.
It would be particularly difficult or unrealistic to try to ensure the projected enhancement of value creation without having the technical capacity to control the threshold of the real-time risk appetite required and focus all the employees on the objectives of the business strategy. IT-IRM is the technology that provides the CFOs with the synchronization tool that was previously lacking.”
Download article Strengthening Value and Risk Culture (May 2016).