Operational Risk Management (ORM) is an effective tool for not only maintaining but increasing, bank profits, shareholder value, public perceptions and goodwill. Executed properly, improvements in ORM can lead to substantial financial, reputational and regulatory benefits – all this adds to increased profitability, greater financial stability and improved customer satisfaction. But to achieve these gains, financial institutions must apply a consistent and comprehensive approach to managing their operational risks. They must also understand that this approach is fundamentally different from the approaches that they use in managing market, credit and liquidity risks.

Bad Operational Risk Management has a severely negative effect on financial institutions in four very clear ways:

Actual operational risk losses are a direct hit to the income statement.

The market punishes companies, via the stock price, for operational risk failures and this loss could well exceed the actual financial loss experienced.

Lowered Credit Ratings, which raises the institutions cost of borrowing money in the marketplace.

Operational risk failures can vastly increase the cost of compliance by raising the level of regulatory scrutiny and complexity not to mention substantial penalties.