Blame games aside, most people in the financial services industry are now focusing on how to make sure the current crisis doesn’t happen again.

Enter Steve Smeltzer, IBM’s global operational risk management practice leader, who flew down to Australia last month to talk to banks about getting their operational risk sorted.

Operational risk focuses on failure of some type of operational business process – it has a very broad scope and can include technology, people (for example rogue traders or fraud), and external factors like terrorism, large-scale natural events or cyberhackers.

Basel II stipulates that banks must have an operational risk management programme in place, alongside similar programmes for credit and market risk.

But these measures did not help to avert the global financial crisis that the world is now struggling to recover from.

Mr Smeltzer says operational risk is a much younger discipline than credit and market risk, and in most companies their operational risk processes have grown over time.

This can lead to silos in different departments.

Mr Smeltzer came to Australia to talk to banks about the idea of convergence; he has helped banks like Citi redesign their processes so they have standardised frameworks for risk across the company.

Companies need to identify what their key risk events are, and key risk indicators – a trigger event, or a trigger level, that could have bad ramifications for the business if not dealt with.

Mr Smeltzer says what has happened in the US over the last years was a failure of basic fundamentals, like simple checking.

For example, housing loans were not documented well, then securitised and repackaged as if they were.

“I wouldn’t quite call it a pyramid scheme, but we really weren’t doing a good job as an industry of checking financials,” Mr Smeltzer says.

“We can all share in that collective blame – it goes right down to consumers taking loans they shouldn’t take, organisationss making loans they shouldn’t make,” he adds.

“The higher the value of loans in your portfolio that are of questionable quality, the higher your losses will go over time.
That’s not rocket science.”

The field of operational risk is of interest to IBM because it provides the technology platforms for the risk management programs it designs.

Mr Smeltzer says technology acts as an enabler; once the right processes are designed, it’s the technology that makes them possible to implement.