A review of operational risk in banks and its role in the financial crisis

Abstract

The role of operational risk in the 2007/2008 financial crisis is explored. The factors that gave rise to the crisis are examined and it is found that although the event is largely regarded as a credit crisis, operational risk factors played a significant role in fuelling its duration and severity. It is concluded that, from an operational risk perspective, 2008 was the worst on record. Considering the extensive role of operational risk in global financial calamities, suggestions are made to improve the management of this risk type.

Operational Risk Management in Financial Institutions: An Overview

“…Also, Jongh et al, (2013) contend that the appearance of modern and advanced IT systems has increased the attention of operational risk management in financial institutions. Accordingly, Apatachioae (2014) stresses that the imperfection of the IT and data architecture to support the process of risk management is one of the most excellent lesson learned by operational risk managers from the financial crisis of 2008.…”

Analysis of Impacts of Operational Risk Management Practices on Banks’ Financial Performance: Study of Selected Commercial Banks in Nigeria

“…However, the inability of banks to meet its intermediation obligations introduces some vulnerability into the financial system. In fact, some studies have shown that inadequate management of these vulnerabilities may fuel a sovereign debt crisis (Jongh, Jongh, Jongh & Vuuren, 2013). Though risk taking is an integral part of banking, albeit, bank management should balance its risk and return to make adequate profit and remain a going concern, else, the bank, financial system and the economy at large may be adversely impacted; as was the case of the Asian Financial crisis of 1997 -1998.…”

“…Chernobai, Jorion and Yu (2011) asserted that several high-profile losses were linked to operational risk; an example is the $7.2billion loss at Société Générale of 2008 which was largely due to absence of internal controls and unmanaged operational risks. Jongh et al (2013) asserted that the 2008 financial crisis resulted from failure to manage operational risk in banks and mortgage brokers. These myriads of issues have made regulators beam more light on the banking industry and increase the demand for better management of operational risks.…”

Capital Structure and Liquidity as Measures of Efficiency: The Case of Islamic Banks

“…Efficiency of commercial banks has been cited as one of the key factors contributing to their successes or failures (Barr, Seiford, and Siems, 1994). Additionally, an efficient banking sector leads to economic growth and sustainable development (Huang & Tang,2012;De Jongh, De Jongh, Jongh, & Gary, 2013). The necessity to have an efficient banking industry to sustain economic growth is well known (De Jongh, De Jongh, Jongh, & Gary, 2013).…”