Managing Operational Risk in Payment, Clearing, and Settlement Systems
AbstractAwareness of operational risk has increased greatly in recent years, both at individual financial institutions and for payment, clearing, and settlement systems (PCSS). PCSS consist of networks of interconnected elements (i.e., central operators, participants, and settlement agents); operational problems at any one of the key elements have the potential to disrupt the system as a whole and negatively affect financial stability. The author describes the key features of systemically important PCSS in Canada and the oversight role of the Bank of Canada with respect to those systems. She also describes one approach that could be used to assess and manage operational risk in Canadian PCSS. This approach relies on a consistent definition of operational risk that can be applied across all elements of a PCSS. It uses a recent methodology adapted from the management of operational risk at individual financial institutions. This methodology, called the loss-distribution approach, assesses risk in terms of the potential outcomes of operational events owing to certain risk factors (such as systems problems, human error, process problems, and external events), their likelihood, and their frequency. Once operational risk databases are developed that record the frequency and severity of operational events, it will be possible to estimate parts of the loss distributions for PCSS. In the meantime, qualitative analysis provided by operations experts associated with the various elements of PCSS will be important for judging the potential impact and frequency of events. In a changing financial environment, it is hoped that this methodology could be used to supplement core aspects of operational risk management, such as sound corporate governance, internal controls, policies and procedures, knowledgeable people, and robust contingency plans.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 03-2.
Length: 36 pages
Date of creation: 2003
Date of revision:
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Financial institutions; Payments; clearing and settlements systems;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-21 (All new papers)
- NEP-CFN-2003-04-21 (Corporate Finance)
- NEP-FIN-2003-04-21 (Finance)
- NEP-RMG-2003-04-21 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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