Constructing meaningful operational risk scenarios

Constructing meaningful operational risk scenarios

By Anit Deb, Head of External Industry Coverage, Deutsche Bank.

Anit, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

My current responsibility is Head of External Industry Coverage as part of our Non-Financial Risk Management function. I have joined Deutsche Bank in 2014 and before that I have spent several years in management consulting.

At the New Generation Operational Risk Europe Summit, you will be sharing your insight regarding scenario analysis: Constructing meaningful operational risk scenarios to understand risks and make informed decisions. Why do you believe this is a key talking point in the industry right now and what can risk professionals gain from this insight?

The industry has undertaken great efforts to overcome legacy issues and it now seems that potential losses attract less attention. However, keeping an eye on potential risks and embedding this into the risk management framework will enable institutions to be aware of any such large risks. Scenarios are a very effective way to achieve this.

Why is it important that financial institutions make scenarios realistic yet extreme?

The scenario process should combine quantitative and qualitative aspects. While the industry focused on the quantification of a scenarios, it seems that the focus is now much more on qualitative information. It is actually not that important to precisely quantify a potential loss in the form of a scenario. Instead, aligning scenarios to existing processes such as top risk management and mitigation measures is far more important. By doing so, scenarios become part of an effective risk management.

How can institutions best gain value from stress scenarios?

It is about the depth of conversation and challenge around scenarios. Simply put, the more institutions discuss potential risks, the better they are prepared. Conducting regular workshops or simply having informal chats around scenarios are fruitful aspects for an effective operational risk management.

How would you recommend financial institutions optimaly integrate scenario analysis into the framework and assessment process?

The key point I want to make is that scenarios should not just be in place because these are considered industry practice. The more important aspect is that scenarios should be embedded as part of a strong overall operational risk management framework.

What, in your opinion does the future hold for operational risk professionals, and how can they keep up with the increasing change?

The beauty of working in operational risk is that you get a very broad range of expertise, be it methodology, processes, control environment or even product knowledge. Embracing these opportunities will likely result in a operational professional to be an effective counterpart. Therefore, I am quite optimistic for those working in operational risk.