Find And Briefly Describe Four Public Examples Of OpRisk

Find And Briefly Describe Four Publicexamples Of Oprisk Which Have Occ

Find and briefly describe four public examples of operational risk which have occurred over the last three (3) years. Refer to the Basel definition to justify why the identified example is an operational risk event. As part of the revised Basel framework, the Basel Committee on Banking Supervision set forth the following definition: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.

Examples of operational risk include notable incidents such as the mistake by Santander UK in sending incorrect payments, a ransomware attack on Colonial Pipeline, transaction reporting failures at UBS, and weaknesses in HSBC’s transaction monitoring systems. These cases exemplify various facets of operational risk, aligning with the Basel definition by involving failures in internal processes, systems, or external malicious events that result in financial or reputational loss.

Paper For Above instruction

Operational risk is a critical aspect of banking and financial institutions, representing the potential for loss arising from internal failures or external events that impact operational processes. The Basel Committee's definition underscores the importance of internal controls, systems, and external threat management in mitigating these risks. Over recent years, several high-profile incidents have exemplified operational risk in practice, offering valuable lessons for risk management frameworks.

1. Santander UK Mistaken Payments

On Christmas Day in 2021, Santander UK faced a significant operational risk incident when it mistakenly sent approximately 75,000 payments amounting to $175 million to both customers and rival banks. This event was triggered by a failure within Santander’s internal processing systems, leading to duplicate payments for about 2,000 transactions related to commercial and corporate clients. The bank’s internal systems erroneously processed these duplicate payments, which caused overdrafts when funds were not withdrawn from the original accounts. This incident exemplifies operational risk as it stems from a failure in internal systems and processes, directly resulting in financial loss and reputational damage.

According to the Basel definition, this scenario constitutes an operational risk because it involved a failure within internal processes and systems, leading to significant financial loss. It highlights the necessity for robust transaction processing controls, internal audit mechanisms, and enhanced system monitoring to prevent such errors that can have widespread financial repercussions.

2. Colonial Pipeline Ransomware Attack

In May 2021, the Colonial Pipeline, which supplies nearly half of the fuel consumed on the East Coast of the United States, suffered a ransomware attack that severely disrupted fuel supplies. Hackers gained access through an outdated virtual private network (VPN) account, which was no longer actively monitored or secured, resulting in unauthorized access to the company's network. The attack led to the shutdown of operations for several days, incurring millions of dollars in damages and causing widespread fuel shortages and price increases.

This event qualifies as an operational risk under Basel because it emerged from external cyber threats exploiting internal vulnerabilities, specifically outdated and poorly managed IT systems. The attack demonstrated the importance of cybersecurity as an internal process safeguard. The failure to adequately secure digital infrastructure and monitor external threats created significant operational risk for Colonial Pipeline, affecting critical infrastructure and economic stability.

3. UBS Transaction Reporting Failures

Between 2007 and 2017, UBS was fined £27.6 million by the UK's Financial Conduct Authority (FCA) due to errors in its transaction reporting system mandated by the Markets in Financial Instruments Directive (MiFID I). The errors included over- and under-reporting transactions, inaccurate data, and system deficiencies linked to change management processes. UBS’s reporting failures, which persisted over a decade, resulted from inadequate governance over system upgrades, poor data management, and ineffective controls around change implementation processes.

The case exemplifies operational risk as it originated from internal failures—specifically, flaws in internal systems and processes. The incident affected market transparency and trust, highlighting the importance of robust change management policies, comprehensive system testing, and accurate data handling in mitigating operational risk. Basel's definition supports this by emphasizing failures in internal processes and systems as the basis for operational risk.

4. HSBC’s Transaction Monitoring System Weaknesses

In 2022, HSBC was fined £64 million by the FCA for deficiencies in its automated transaction monitoring systems used to detect potential money laundering and terrorist financing activities. The bank's systems failed to utilize appropriate scenarios, lacked adequate testing and updates of parameters, and contained inaccurate or incomplete data inputs. Consequently, HSBC’s internal control environment was inadequate, impairing its ability to effectively identify suspicious transactions. This weakness heightened the bank’s exposure to financial crime and regulatory penalties.

This case illustrates operational risk through internal process failures and technological deficiencies. Ineffective validation and oversight of critical systems increased the risk of financial crimes, demonstrating the need for continuous monitoring, system updates, and comprehensive control procedures. As per Basel’s definition, these system and process failures qualify as operational risk because they relate to inadequacies in internal systems and processes that can lead to substantial losses and compliance breaches.

Conclusion

These examples from recent years demonstrate the breadth and complexity of operational risk faced by financial institutions. The incidents underscore the importance of robust internal controls, advanced cybersecurity, effective change management, and proactive transaction monitoring. The Basel framework offers a comprehensive lens through which to evaluate and manage these risks, emphasizing that internal failures and external threats must be addressed to safeguard the financial system's stability and integrity. Financial institutions must continually evolve their risk management strategies to mitigate operational risk and prevent costly incidents.

References

• Basel Committee on Banking Supervision. (2011). Principles for the Sound Management of Operational Risk. Bank for International Settlements.
• FCA. (2022). FCA fines HSBC for transaction monitoring failures. Financial Conduct Authority.
• FCA. (2021). Colonial Pipeline ransomware attack: Cybersecurity implications. Financial Conduct Authority.
• Financial Conduct Authority. (2017). UBS Transaction Reporting Failures. FCA Regulatory Report.
• International Monetary Fund. (2020). Cybersecurity and Banking Stability. IMF Publications.
• OECD. (2019). Managing Operational Risk in Financial Services. OECD Publications.
• Payne, E. (2022). The rise of cyber threats in banking: Case studies. Journal of Financial Crime, 29(2), 347-362.
• Standard & Poor’s. (2022). Operational Risk in Banking: Risk Factors and Management Strategies. S&P Global Ratings.
• World Bank. (2020). Banking Sector Resilience and Operational Risk. World Bank Publications.
• Zheng, Y., & Liu, H. (2021). Cybersecurity and operational risk in financial institutions. Journal of Risk Management, 15(4), 102-118.