Operational Risk Takes Center Stage: Heller Financial Faces Its Operational Challenges Head On

Of course, Heller is not alone when it comes to operational risk losses costing millions of dollars. The Federal Reserve Bank estimates that around one-third of all write-offs are operational in nature. And with the Bank for International Settlements and the Basel Committee on Banking Supervision evaluating the potential capital allocation requirement for operational risks, many firms are re-evaluating their risk policies and processes to account for operational risks present in the various business lines. ""They are looking at assigning a capital charge for operational risk, which is a very difficult thing to do because levels of operational risk are very much tied to the businesses the firm is engaged in,"" says Pam Martin, director of regulatory relations at the Risk Management Association (RMA).

Operational risk may be different from firm-to-firm and business line-to-business line, but what is being done to address operational risk management in terms of technology? Measurisks's COO Andrew Lapkin says there are two different approaches in the financial industry toward operational risk management. The first is a purely quantitative approach of gathering historical data on loss events and occurrences to quantify the amount of money at risk due to operational losses. The second is more of a qualitative approach similar to an audit that assesses operational controls and procedures that are in place. Richard Bennett, director of operational risk at Algorithmics, agrees that there are two distinct approaches and advocates starting with the latter and doing a thorough assessment of operational risk within an organization.

Heller Financial is in the process of implementing both approaches, with the help of eRisks and an overall enterprise risk management overhaul. ""First we did an assessment as to their risk management infrastructure--the committee, the reporting and the policies they have in place,"" explains James Lam, founder and vice chairman of eRisks. ""Second we helped them establish an overall vision of enterprise risk management. Thirdly, once we established a division for enterprise risk management, we saw a real gap in operational risk management."" Lam worked with Heller to develop an operational risk methodology that is applied to the business units to address the identification of operational risk, including measurement and the specific metrics appropriate for different types of operational risk. The methodology, which can be applied across the entire organization, also addresses operational management strategies and whether Heller should develop internal controls or external risk transfer for those operational risk areas.

Yet another interesting aspect of Heller's overall risk management strategy which fits in nicely with operational risk control is an up-and-coming approach known as Six Sigma. Although it began in manufacturing, Six Sigma is a quality improvement and business strategy that Heller is applying to improve its operational processes and thereby reduce operational risks. ""It's a continuous improvement process that is statistically based and goes through a very detailed analysis of work flow and really aims to make the process as simple as possible,"" notes Litwin. ""By so doing, it almost always eliminates parts of the process and creates a higher level of quality because there is less operational risk attached and more efficiency."" Heller has assigned dedicated resources and personnel who have been sent to specific Six Sigma training.

Heller is also in the process of building databases for its risk management needs, one of which is a best practices database for operational risk management where best practices will be identified and categorized. ""For example, we can analyze all of our write-offs and non-earning assets and categorize them and be able to access the data to identify trends and understand if we're finding recurring issues that need to be addressed,"" says Litwin. He adds that the database can also be used to quantify progress and ultimately reduce overall operational risk within Heller. Ultimately, Litwin emphasizes that Heller's approach to risk management and specifically operational risk management is very much a value creator. ""At the end of the day, we are a credit granting institution and to the extent that we can instill confidence that we have the ability to manage the risk within our company better than our peers, we should attract greater confidence and greater value. That's really the name of the game,"" concludes Litwin.

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