Securitisation and Operational Risk

Rewind to 2008. The there was one word that got everyone's hair to stand on end, at that time, it was "securitisation". Now almost six years later securitization is making a comeback. And in some circles the stigma attached to the word "securitisation" has hardly faded.

Securitization as such was never the problem. The real issue was the lack of proper risk management – at both the credit risk and the operational risk levels.

The credit risk side is pretty easy to understand. The operational risk aspect is a bit more obscure.

Under the Basel Accords operational risk requirements, bank management have long been charged (and this goes back way before the 2008 crisis) with the responsibility to identify, assess, understand and manage all the risks inherent in all financial products, activities, processes and systems.

The first time around the banks chose to ignore this requirement. There is nothing glamorous in managing your operational risks. It's an activity that banks have long eschewed simply because there is a cost attached to it. And costs detract from profits. Operational Risk Managers are the most unpopular members of the management team – they are always out to spoil everyone's profit making fun.

When you are operating in a highly competitive market there is just no time to do things properly with new financial products, like getting a sign-off from Ops Risk Management. The product/business side of a bank just doesn't want to be reigned-in by an overzealous risk manager. Bank boards tend to share this view too.

On the regulator's side the original problem was ignorance, though by now this has been largely corrected. Regulators say that they have overcome their earlier problems and will be able to cope this time.

Will it be better this time round? I have my doubts.