New Global Banking Survey by Mercer Oliver Wyman Finds Industry Making Significant Progress in Operational Risk Management for Basel II

Business Wire, June 7, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--June 7, 2004

Most Banks Have Moved Beyond Design and Planning Stages, Focusing

Now on Implementation; Quantifying Risk Remains Key Challenge

The global banking industry made significant strides during the past 12 months in advancing their operational risk management capabilities, with most banks well into the implementation phase of their programs, according to a Mercer Oliver Wyman study released today. The report is based on in-depth interviews with more than 40 financial institutions around the world, representing large, internationally active banks subject to Basel II guidelines for operational risk management. Mercer Oliver Wyman, a leader in financial services strategy and risk management consulting, interviewed senior officials with direct responsibility for operational risk management at these institutions.

The Global Study of Operational Risk Management Practices found that while the banks surveyed have steadily advanced the qualitative elements of risk management, including the use of scorecards and self-assessments, quantitative capabilities are under-developed and not yet addressing management needs. Quantifying operational risk is an area that nearly every operational risk manager surveyed is currently focused on, or will soon focus on, with over half (60%) indicating that further investments, resources and assistance will be required.

The study also found that banks continue to confer with both ratings agencies and regulators on operational risk issues. Regulatory guidance remains a troublesome issue for many of the respondents. Approximately 60% of banks across all regions reported that regulatory guidance has been only somewhat clear to date, while the balance of the banks surveyed said that it has been largely unclear.

Bradley Ziff, Director, Mercer Oliver Wyman, said, "Banks would like to see further regulatory guidance and clarity regarding certain requirements in management practices. Despite uncertainty that their methods and techniques will meet regulatory standards, many banks continue to move forward with their current operational risk management frameworks. In some cases, banks are aligning their compliance measures for expected operational risk requirements with other regulatory actions, such as those for Sarbanes-Oxley and corporate governance.

"In the past year, financial institutions have made measurable progress refining their operational risk management approach. Our research tells us that they are at slightly different stages of implementation, but that their focus is uniformly on forging ahead to achieve Basel II compliance in a timely manner," he added.

Other key findings include:

-- Well-developed Areas: Operational risk management frameworks

are now well developed at the majority of banks surveyed

(79%), with organizational structures (personnel, policies,

positions, etc.) also well established. Key management tools

such as loss-data collection programs and qualitative risk

assessments have been implemented and are currently being used

at over half of the survey participants (69% and 52%,

respectively.) Only one-third (31%) have developed advanced

modeling programs, with a number of respondents stating that

methods for quantifying operational risks and allocating

capital constitute the weakest area of their risk management

framework.

-- Under-developed Areas: More than half of the banks surveyed

(57%) identified Key Risk Indicators (KRIs) as a critical area

for improvement in the coming year. An equal number of

respondents (57%) said that measuring the impact of insurance

on the operational risk profile of the bank is another

priority issue that has not been adequately addressed. Other

areas requiring further attention are: loss-data collection

(31%), unbundling credit risk from operational risk (24%) and

modeling (17%).

-- Areas of Focus in 2004: For approximately half of the banks in

the survey, operational risk capital modeling (55%) and data

collection (55%) will be areas of continued focus in 2004,

followed by qualitative analyses (48%), identification and

development of KRIs (45%), management framework (26%) and

staff education (24%).

"Beyond the need to comply with the upcoming Basel II Accord, by far the most pressing issue is for banks to identify and target improvements in business efficiency and integrity that can be delivered by the operational risk management frameworks currently under development," said Jim Wiener, Managing Director, Mercer Oliver Wyman. "We believe that it is only by targeting such improvements that the return on banks' Basel II investment can be properly realized."

Mercer Oliver Wyman was formed in April 2003 from a merger of Oliver, Wyman & Company (founded in 1984) and the financial services strategy and actuarial consulting practices of Mercer Inc., and is now a division with Marsh & McLennan Companies, Inc. The firm currently employs more than 650 staff working out of 25 offices in 12 countries throughout North America, Europe, and Asia.