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The Business Case for Preparedness
Impacts on Credit Rating and Resulting Cost of Borrowing
May 24, 2008 12:14 AM
For large international banks, the capital charge for operational risk will often exceed the charge for market risk.
Moody's asserts that operational risks will affect credit ratings, share prices and organizational reputation. Therefore, analysts will increasingly include it their assessments of management, their strategy and the expected long-term performance of banks.
Source: "Moody's Analytical Framework for Operational Risk Management of Banks", Brendon Young, Moody's Investors Service (Global Credit Research), January 2003
Key Points:
* Moody's believes that the assessment of operational risk is becoming increasingly central to the fundamental analysis of a rated bank. Put simply, operational risk management improves the quality and stability of earnings, thereby enhancing the competitive position of the bank and facilitating its long-term survival."
* The control of operational risk is fundamentally concerned with good management, which involves a tenacious process of vigilance and continuous improvement. This is a value-adding activity that impacts, either directly or indirectly, on bottom-line performance. It must, therefore, be a key consideration for any business. Since operational risk will affect credit ratings, share prices, and organisational reputation, analysts will increasingly include it in their assessment of the management, their strategy and the expected long-term performance of the business."