Risk Management 101: Operational Risk

Within banking, operational risk refers to the risk of a bank becoming unable to execute on the basic functions required for it to stay in operation. To understand operational risk, you first have to consider all the things that have to happen behind the scenes in order for a bank to operate successfully, from complex technologies to the physical transportation of cash. All of these factors that may negatively impact the bank’s ability to keep its doors open and serve customers fit under the category of operational risk.

The area of operational risk is often overlooked from a risk management standpoint. It’s easy for most of us to wrap our heads around the risk of people not repaying their loans, or the risk of stock market downturns and swings in interest rates. Yet, operational risk has proven to be among the greatest risks facing banks today, and that’s only been exacerbated by the COVID-19 pandemic and its impact on the basic functioning of banks nationwide.

Figuring out how to get someone in an office to complete an essential function has been challenging not only for our organization, but also for many throughout the country, highlighting operational risk as something that banks are increasingly required to be mindful of. How can you operate your technology infrastructure so that your clients can not only interact with you in your brick-and-mortar offices, but also via your mobile app, internet banking website, or call center?

Even more pressing, how are you going to recruit the necessary staff amid this Great Resignation that we’re now living through? And if you’re fortunate enough to have highly talented, highly motivated team members already, how can you make sure they stick with your organization for years to come? Finding and retaining great employees has proven to be a crucial consideration within operational risk, and one which we have battled alongside many other industries throughout the country.

Last, but certainly not least, those of us at Merchants & Marine Bank are fortunate enough to live, work, and play along the Gulf Coast of Alabama and Mississippi. What that also means for us is that each year, we endure the risk associated with hurricanes and other inclement weather, which can seriously impact our ability to operate and serve clients.

As a result, we’ve invested a significant amount of resources into making our organization as resilient as possible to all different types of operational threats. Whereas many banks and businesses across the country have had to figure out how to operate with limited staffing and decentralized gas operations for the first time in 2020, that’s something we’ve had to deal with for years.

When Hurricane Katrina reached our office in 2005, we had to reboot our entire operations center from a new location. In the span of two days, our bank went from being eight feet underwater and completely inoperable, to having a fully established operations center in a safe area. We also had full data and reconnaissance capabilities to enable us to communicate with the outside world, and most importantly, to take care of our clients.

As a direct result of that experience and many others, operational risk is something that goes into every facet of our organization.

Written by: Clayton Legear, President & CEO

Click here to listen to Clayton discuss Managing Risk, and in particular what operational risk looks like in today’s community banking industry: