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Prelims

Sophia Beckett Velez Ph.D. (Walden University, USA)

Operational Risk Management in Banks and Idiosyncratic Loss Theory: A Leadership Perspective

ISBN: 978-1-80455-224-7, eISBN: 978-1-80455-223-0

Publication date: 7 December 2022

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Citation

Velez, S.B. (2022), "Prelims", Operational Risk Management in Banks and Idiosyncratic Loss Theory: A Leadership Perspective, Emerald Publishing Limited, Leeds, pp. i-xv. https://doi.org/10.1108/978-1-80455-223-020221040

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Emerald Publishing Limited

Copyright © 2023 Sophia Beckett Velez

Half Title Page

Operational Risk Management in Banks and Idiosyncratic Loss Theory

Title Page

Operational Risk Management in Banks and Idiosyncratic Loss Theory: A Leadership Perspective

BY

SOPHIA BECKETT VELEZ, PH.D.

Walden University, USA

United Kingdom – North America – Japan – India – Malaysia – China

Copyright Page

Emerald Publishing Limited

Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2023

Copyright © 2023 Sophia Beckett Velez.

Published under exclusive licence by Emerald Publishing Limited.

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No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-80455-224-7 (Print)

ISBN: 978-1-80455-223-0 (Online)

ISBN: 978-1-80455-225-4 (Epub)

Dedication Page

To my daughter Shikurah Velez, you are my biggest cheerleader, and I am thankful for your love and support.

To Ms Henry my third-grade teacher at Goshen Primary School, Lucky Hill, St Mary, I thank you for believing in my abilities as a student. This dream could not have actualized if it wasn’t for your hard work and time spent mentoring me.

To my cousins Doreen Ellis and Albert Ellis (Bogart), I could not have done this book if it wasn’t for the role model you played in my early life that has stayed with me throughout the years. You have always believed in me.

Contents

List of Tables ix
About the Author xi
Preface xiii
Acknowledgement xv
Introduction: Outline of Chapters 1
Part 1: Idiosyncratic Viral Losses Behaviour and Global Economic Impact
Chapter 1: Idiosyncratic Viral Losses and Their Behavioural Practices 7
Chapter 2: Regulation of Operation Losses and Capital in Banks 23
Chapter 3: Idiosyncratic Losses in Mega Banks and SIFIs 37
Chapter 4: SIFI Losses and Global Economic Impact 49
Chapter 5: Idiosyncratic Viral Losses and Operational Risk 57
Part 2: Nature of Systemic Operational Risk (Human Error, Fraud, and Legal)
Chapter 6: Human Errors and Processing Errors 69
Chapter 7: Fraud and Criminal Activity 81
Chapter 8: Internal Fraud 95
Chapter 9: External Fraud 105
Chapter 10: Legal Expenses, Legal Settlements, and Statutory Penalties 113
Part 3: Operational Risk Environment and Leadership
Chapter 11: Technology Risk 119
Chapter 12: Natural Disasters and Viruses 131
Chapter 13: Risk Management 135
Chapter 14: Bank Operational Environment as Host for Idiosyncratic Viral Losses 153
Chapter 15: Control Environment and Systemic Risk 159
Chapter 16: Governance and Leadership 165
References 179
Index 189

List of Tables

Table 2.1. Governance Practices Third Round Data: Non-consensus 26
Table 2.2. Assurance Practices Third Round Data: Non-consensus 27
Table 2.3. Governance Practices Third Round Data: Non-consensus. 28
Table 2.4. Risk Practices Third Round Data: Non-consensus 29
Table 2.5. Internal Control Activities Third Round Data: Consensus 30
Table 2.6. Assurance Practices Third Round Data: Non-consensus 31
Table 2.7. Internal Control Practices Second Round Data: Non-consensus 34
Table 3.1. Risk Management Practices Third Round Data: Consensus 43
Table 3.2. Governance Practices Third Round Data: Non-consensus 44
Table 3.3. Governance Practices Third Round Data: Consensus 45
Table 4.1. Governance Practices Third Round Data: Non-consensus 56
Table 5.1. Internal Control Activities Third Round Data: Non-consensus 60
Table 5.2. Internal Control Activities Third Round Data: Non-consensus 61
Table 5.3. Governance Practices Third Round Data: Non-consensus 62
Table 6.1. Internal Control Activities Second Round Data: Non-consensus 72
Table 6.2. Internal Control Activities Third Round Data: Consensus 73
Table 6.3. Internal Control Activities Third Round Data: Non-consensus 75
Table 6.4. Governance Practices Third Round Data: Non-consensus 76
Table 6.5. Compliance Practices Second Round Data: Non-consensus 77
Table 6.6. Compliance Practices Third Round Data: Non-consensus 78
Table 7.1. Internal Control Activities Third Round Data: Non-consensus 85
Table 7.2. Internal Control Activities Third Round Data: Non-consensus 86
Table 7.3. Internal Control Activities Third Round Data: Non-consensus 87
Table 7.4. Internal Control Activities Third Round Data: Non-consensus 88
Table 7.5. Internal Control Activities Second Round Data: Non-consensus 89
Table 7.6. Internal Control Activities Third Round Data: Non-consensus 90
Table 7.7. Internal Control Activities Second Round Data: Non-consensus 91
Table 7.8. Internal Control Activities Third Round Data: Non-consensus 92
Table 7.9. Internal Control Activities Third Round Data: Consensus 93
Table 8.1. Internal Control Activities Second Round Data: Non-consensus 97
Table 8.2. Internal Control Activities Third Round Data: Consensus 98
Table 8.3. Governance Practices Third Round Data: Non-consensus 99
Table 8.4. Risk Management Practices Third Round Data: Consensus 100
Table 8.5. Compliance Practices Second Round Data: Non-consensus 101
Table 8.6. Compliance Practices Third Round Data: Non-consensus 102
Table 9.1. Governance Practices Third Round Data: Consensus 109
Table 9.2. Governance Practices Second Round Data: Non-consensus 111
Table 11.1. Governance Practices Third Round Data: Non-consensus 122
Table 11.2. Governance Practices Third Round Data: Consensus 123
Table 11.3. Internal Control Activities Third Round Data: Consensus 124
Table 11.4. Internal Control Activities Second Round Data: Non-consensus 125
Table 11.5. Compliance Practices Second Round Data: Non-consensus 126
Table 11.6. Internal Control Activities Second Round Data: Non-consensus 127
Table 11.7. Compliance Practices Third Round Data: Non-consensus 128
Table 11.8. Internal Control Activities Second Round Data: Non-consensus 129
Table 13.1. Risk Management Practices Third Round Data: Consensus 138
Table 13.2. Risk Management Practices Third Round Data: Non-consensus 139
Table 13.3. Risk Management Practices Third Round Data: Non-consensus 140
Table 13.4. Risk Management Practices Third Round Data: Non-consensus 141
Table 13.5. Risk Management Practices Third Round Data: Non-consensus 142
Table 13.6. Risk Management Practices Third Round Data: Non-consensus 143
Table 13.7. Risk Management Practices Third Round Data: Non-consensus 144
Table 13.8. Risk Management Practices Third Round Data: Non-consensus 145
Table 13.9. Risk Management Practices Third Round Data: Consensus 146
Table 13.10. Risk Management Practices Third Round Data: Non-consensus 147
Table 13.11. Governance Practices Third Round Data: Non-consensus 149
Table 13.12. Governance Practices Third Round Data: Non-consensus 150
Table 13.13. Governance Practices Third Round Data: Non-consensus 151
Table 15.1. Statements Failing to Pass to Round 3 161
Table 15.2. Statements Failing to Meet Consensus Threshold in Round 3 162
Table 16.1. Compliance Practices Third Round Data: Consensus 171
Table 16.2. Assurance Practices Third Round Data: Consensus 172
Table 16.3. Risk Management Practices Second Round Data: Consensus 173
Table 16.4. Risk Management Practices Third Round Data: Consensus 174
Table 16.5. Risk Management Practices Third Round Data: Consensus 175
Table 16.6. Risk Management Practices Third Round Data: Consensus 176

About the Author

Sophia Beckett Velez, PhD, has worked for over 16 years as a Certified Public Accountant (CPA) with large banks providing consulting services. Her work experience has provided her with valuable background information on the banking industry in general. As a CPA, she worked for firms such as PricewaterhouseCoopers, where she performed financial audits, attestation services, and risk management analysis of large banks. Many of the regulatory compliance problems noted during her review of the large banks required her to cultivate relationships with line of business managers, and work with them to develop action plans and solutions to the issues noted. This has sparked her research interest in exploring the issues at hand in the banks, magnified subsequent to the 2008 recession.

Preface

This book discusses idiosyncratic viral loss theory and systemic operational losses that are evident in human error, fraud, and legal expenses that are aligned to systemic operational risk. Systemic operational risk events that lead to substantial losses in significant financial institution (SIFI) banks expose them to insolvency, cause significant volatility, and unpredictable negative impact on the US economy. A qualitative e-Delphi study of 10 banking finance experts were convened to build consensus on effective risk management practices. The conceptual framework for this study was the Open Compliance and Ethics Group’s (OCEG’s) standard that integrates governance, risk management, internal control, assurance, and compliance (GRC capability model) into one functional goal to improve quality and principled performance through measurable tools that may enhance effectiveness and efficiency practices. The important considerations identified are: (a) a comprehensive enterprise-wide risk; (b) controlling fraud; (c) going beyond the minimum risk assessment requirements set forth by the banking regulators; (d) independent risk identification and management that can bolster effective risk management practices. These considerations towards effective risk management practices may help reduce systemic operational losses viral spread in banks.

A systemic risk event that leads to significant losses in banks classified as SIFI can expose them to insolvency and have negative impacts on the US economy. The viral spread of operational losses through global markets by interconnected multinational banks can be compared to viruses’ spread through interconnected countries and the significant losses incurred can be referred to as idiosyncratic viral loss theory.

This book offers an original contribution to the field of banking that undergraduates, master’s and PhD students, academics, and researchers can use to gain a deeper understanding of idiosyncratic viral losses in banks and the use of effective risk management practices.

This book will be the first to discuss idiosyncratic viral loss theory and systemic operational losses in banks.

Acknowledgement

This book could not have been written without the support and encouragement of my daughter Shikurah Velez.

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