Banks Get With The Risk Program

Several large financial institutions, including Freddie Mac, Merrill Lynch and Bank of Tokyo-Mitsubishi North America, have implemented Horizon, an operational risk self-assessment tool from J.P. Morgan Chase.

For these clients, the backing of a global bank provided an important proof-of-concept. "It was built by someone that uses it as opposed to a consultant or a software company," said Mark Balfan, senior vice president and group head of corporate risk management at Bank of Tokyo-Mitsubishi. "They were using it for years, and we were able to come in and speak to J.P. Morgan about how they were using it."

Originally deployed in-house by J.P. Morgan in 1999 for its technology group, the Horizon tool quickly gained traction elsewhere within the firm. "Once it was released for the technology group, others within Morgan wanted to get their hands on it," said Marguerite Carberry, vice president at J.P. Morgan Chase. "Once the merger hit, it became the standard in the combined firm as well."

Horizon provides a centralized, Web-enabled repository of information about operational risks, with the ability to associate a particular risk with a given group or even a specific desk. Each individual risk element can further be decomposed into subrisks and detail items, which then can be assigned to individuals for follow-up. For auditing purposes, risk assessors and assessing organizations are also tracked within the system.

But the system's real value comes from requiring businesses to fill it in with actual information. Because employees have to identify weaknesses within their own areas of responsibility, implementation often meets with organizational resistance.

"The hardest part is the data," said Balfan. "It's getting the businesses to look at what they do objectively, and to identify weaknesses within their control infrastructure."

Still, Bank of Tokyo-Mitsubishi was able to deploy Horizon fairly rapidly. "We have rolled out self-assessment to all BTM businesses within the Americas," said Balfan. "Start to finish, it was about six months."

Banks that successfully negotiate operational risk have a better chance of avoiding losses, say Horizon's backers. Plus, banks with expertise in managing operational risk will be able to reduce their capital reserves under the new Basle Capital Accord.

The Capital Accord mandates that banks collect information on actual operational risk losses, identify and monitor key risk indicators, and perform self-assessments of operational risk exposures throughout the firm.

"Horizon basically fills in the third prong of this three-prong mandate given us by the Capital Accord, which must be implemented by 2006," said Balfan. "If someone were really smart out there, and provided one tool for all three prongs, that would be the holy grail for operational risk."