III. METODOLOGÍA
3.5 Procedimiento
The emergence of operational risk management in the banking industry has taken place within a broader business and regulatory context. As we saw in Chapter 3 considerable investment in the development and application of economic capital measurement techniques was motivated in part by a need to gain more risk-based control over transactions by charging businesses with the cost of risk capital. In theory, the sum of all such capital requirements calculated on a bottom-up transactions basis represents the economic capital at risk of the Wrm as a whole (subject to diversiWcation allowances) and provides a guide to reserving requirements for unexpected losses. Measures of capital at risk, such as Riskmetrics, grew in external importance and formed the basis for a new kind of dialogue between banks and regulators about capital adequacy.
The Invention of Operational Risk / 119
Pillar 1 of the new Basel accord deWnes a discursive space within which regulators and managers may disagree about speciWc aspects of calculating risk capital but share an underlying assumption that management demands measurement. As noted in Chapter 3, VaR is not only signiWcant for its capacity to calculate speciWc numbers for capital at risk, subject to assump-tions. It also represents an ideal of regulatory and managerial control based on capital as a common language for internal and supervisory management.
Whatever the micro-politics of implementation and variability of method, calculating capital is a deep-seated aspiration which establishes the possibil-ities of discourse between banks and regulators. However, while the Weld of banking risk management seems to exhibit a profound ‘trust in numbers’
(Porter, 1995) (more accurately, a trust in models), on deeper inspection this trust is more complex and varied.
The ideal implicit in Pillar 1 is that capital measurement methodologies which have been accepted in the Weld of market and credit risk management can and should be extended to operational risk. Operational risk is a new category in need of being populated by institutionalized forms of calculation (Alexander, 2003). The need to calculate a VaR equivalent for operational risk quickly deWned a new sub-community of interest in the risk management Weld, namely calculative idealists committed to extending the broad calculative logics of RAROC and VaR. Calculative idealists typically regard numbers as aiming to represent the true cost of economic capital based on high quality frequency data, and to induce correct economic behaviour in the light of these risk measures. Operational risk must be made to Wt this knowledge paradigm of risk measurement deWned by a market risk benchmark.
Calculative idealists are reductivists. They hold a deeply non-pluralist view of operational risk management and worry constantly about the ‘robust’ and
‘hard’ nature of operational risk analysis. They may be cautious about speciWc methods but they refer often to the ‘immature’ nature of risk modelling for operational risk and are dismissive of scorecards as anything but a temporary measure. Their knowledge base in Wnancial economics exhibits deep-seated assumptions about calculation as an ideal and they have a dislike for the messy, recalcitrant nature of operational risk and its data poverty.16 They ignore or look down on internal auditors and regard COSO as a muddled and misleading basis for risk management (e.g., Samad-Khan, 2005).
In contrast, practitioner debates about operational risk reveal another class of commentator which may be called calculative pragmatists. They are more 120 / Organized Uncertainty
sceptical about the role of numbers in managing operational risk, especially legal risks (Kuritzkes and Scott, 2005). They typically regard them as atten-tion-directing devices with no intrinsic claims to represent reality, or at best as a very partial representation of enterprise risks.17 Calculative pragmatists are more tolerant about risk and control scoring systems and crude approx-imations of capital provided they help to steer behaviour and action in the right direction. They are more pluralistic about operational risk manage-ment, partly because they think capital should not be the sole foundation of risk management practice: ‘operational risk management is about internal controls, not about quantiWcation and capitalization’; the quantiWcation of operational risk is just one tool for controlling it (Cagan, 2001). Indeed,
‘given the diYculty of quantifying aspects of operational risk, the reliance on a single number may itself be an operational risk’ (Wilson, 2001).18
Calculative pragmatists regard operational risk as more akin to a craft than a science. They place much greater emphasis on the role of preventative internal controls than idealists (e.g., Mestchian et al., 2005). Core knowledge is based in the disciplines of audit, of credit control and settlement systems management, in business processes and in human resource management.19 Calculative prag-matism, commonly referred to by idealists as ‘soft’ risk management, makes sense in environments where it is critical to identify and catalogue risks which lie at the limits of formal knowledge. Many calculative pragmatists believe that VaR models do not transfer well to operational risk, prefer probabilistic scenarios, and tolerate self-assessment where completeness of risk identiWcation is critical. Scoring systems which emerge from consultative, focus group processes make risk identiWcation and mapping a semi-expert practice which presupposes a ‘knowledge and wisdom base in all organizations that can provide powerful feedback for the purpose of mapping risks’ (Cagan, 2001). For calcu-lative pragmatists, scoring systems for economic capital which generate crude but directionally eVective RAROC numbers have the critical behavioural merit of reminding line managers about the cost of capital.20
The distinction between calculative idealists and pragmatists has been some-what exaggerated to make a point about two logics of calculation and two practitioner identities in the Weld of operational risk. The observable diVerences are naturally more subtle than this. Idealists may behave as pragmatists in the short run, waiting for the day when operational risk ‘matures’. They tolerate scoring systems as a way of constructing the Weld and they may display scepticism about models, but this is more for practical than fundamental The Invention of Operational Risk / 121
reasons. Idealists may also realize that it is smart to make appropriate statements about governance and internal control. On the other side pragmatists do not think that calculation has no place in operational risk management; so they will support its development enthusiastically. However, they will tend to construct operational risk management with the help of standards such as COSO as the management of risk management and see it as having a higher order govern-ance role, standing in a hierarchical relation to the calculative idealism of market and credit risk management functions (e.g., Aerts, 2001). Pillar 2 appeals to pragmatists because a philosophy of relying on ‘solid management processes’
seeks to activate senior management responsibility for the self-assessment of risk, that is, the ‘management of risk management’. However, it should not be forgotten that pragmatists and idealists are likely both to share a distrust of arbitrary supervisor discretion, either through judgements about the quality of internal controls in the second pillar, or by orders to modify banks’ own calculations of economic capital. Nevertheless, there is a fault line within operational risk discourse which runs deep and reXects antagonisms about the role of measurement in management.21 The two contrasting styles of approach to operational risk represent competing knowledge discourses or ‘logics of practice’, a ‘tug of war’ (HoVman, 2002: 186). Basel 2 accommodates these logics in Pillar 1 and Pillar 2, the diVerence between which broadly reXects the diVerence between risk analysis and the narratives of risk governance as discussed in Chapter 1. Concrete realizations of operational risk management embody these deeper tensions between diVerent constellations of quantitative expertise in organizations.
The tension between calculative pragmatism and idealism also reXects a disciplinary collision between diVerent bodies of knowledge with a claim on the management of uncertainty: auditing and Wnance. The former is a pragmatic craft, despite a history of scientiWc pretensions, and the latter draws upon advanced mathematical techniques to model ‘market’ and ‘credit’ risks.22 So the diVerences within notions of economic calculation which are visible in the operational risk debate also correspond to competing occupational mobility projects. The case of operational risk shows how private actors enlisted in support of the ‘enforced self regulatory’ ideal of Basel 2 compete to construct the manageability of risk in their own image.
A growing body of work in the social studies of Wnance emphasizes the performative character of calculation. By this is meant the fact that calculative technologies co-produce the risk objects that they measure, such 122 / Organized Uncertainty
as value (Mackenzie and Millo, 2003; Mackenzie, 2005; KaltoV, 2005: 75). This chapter has shown how spaces for calculation, and demands for risk calibra-tion, must themselves be constructed by systems of concepts and categories.
The category of operational risk became institutionalized and accepted before any particular calculative construction of it, just as institutional demands for
‘eYciency’ or ‘value-added’ came to be accepted as ideas before their realiza-tion in speciWc projects of calcularealiza-tion (Burchell et al., 1985). The case of operational risk also reveals additional complexity and shows how material realizations of operational risk remain varied because its management can be
‘performed’ according to diVerent calculative pathways. The authors of Basel 2 sensibly sought to accommodate and formalize this diversity in the diVer-ence between Pillar 1 and Pillar 2 prescriptions without fully realizing that the category of operational risk would become a stake in the competition for pre-eminence within management hierarchies.
To summarize: practitioner debates about operational risk are informed by wider presumptions about the calculation of economic capital. Like discus-sions about market risk management, they refer extensively to issues of quantiWcation, but not in a consistent manner. The reason for this incon-sistency lies in a fundamental diVerence between two philosophies of calcu-lation. Idealists regard managing operational risk as no diVerent in principle from market risk or credit risk; they assume it is a monster to be ultimately tamed within these frameworks. Pragmatists accept much of the idealists’
need to model where this is possible, that is, in restricted cases of homogen-ous, high frequency data sets, but they place greater emphasis on manage-ment processes and internal controls as the foundation of operational risk management. Although these ideal diVerences are rarely manifest in a pure form, they surface constantly in policy discussions about Basel 2 and in variations in the approaches adopted by particular banks.