[Press and Publications] BSE and Train Crashes Down to Poor Risk Management



November 2000

No 205

Risk Management – Special Issue

A special issue of Risk Management, published by the University of Leicester Scarman Centre, explores recent events such as the Hatfield rail crash, the Bristol Royal Infirmary Inquiry and management of the BSE crisis, presenting the views of regulators, practitioners and researchers.

Dr Martin Gill is Director of the Internationally renowned Scarman Centre and editor of the international journal Risk Management. He notes that this important volume of papers underline the importance of effective operational risk management.

As Dr Martina McGuinness says, ‘Train crashes at Paddington and Hatfield have left the rail industry in crisis and clearly demonstrated the disastrous human consequences of poor operational risk management’.

Guest editor, and external examiner at the University of Leicester Scarman Centre, Dr Clive Smallman notes, ‘The Bristol Royal Infirmary Inquiry showed the impact of poor operational risk management in the public sector. More recently the Phillips Report highlighted shortcomings in the management of the BSE crisis’.

Moreover, ‘the financial sector has also witnessed crisis, from the collapse of BCCI and Barings Bank in the UK to the failure of LTCM in the US with losses of $3.625billion. As a result, there have been a number of regulatory and industry initiatives aimed at ensuring such disasters do not happen again. This means that operational risk management is now at the top of many corporate agendas’.

Dr Clive Smallman, Senior Research Associate at the Judge Institute of Management Studies, Cambridge, warns that while crises are often blamed on poor financial risk management, in reality ‘at the heart of these crises are failures of processes and fundamentally of people’.

From the regulator’s perspective, Jeremy Quick of the Financial Services Authority suggests that there has been a changing pattern of risk in the banking sector which has created a new challenge for regulators and supervisors. This new category of ‘other risks’ is still inadequately catered for under existing banking supervision agreements. He suggests that major steps are needed to respond to these and that a fresh methodology is necessary which, if adopted, means that “supervisors will continue, rightly, to be a few steps behind the industry, but they will be much closer than in the past.”

However, good operational risk management does not merely offer the mitigation of negative risk, the authors also show how it can be used to give a company an edge over its competitors. McCrae and Balthazor note that, "Effective risk management can give firms a significant competitive advantage".

But part of the problem is that in a rapidly changing commercial environment, people rush to judgement. And where major issues of risk management are concerned there can be serious consequences. Keith Blacker asks whether banks are rushing into the new technology at the expense of managing the risks involved. Internet banking risks have been manifesting themselves at Barclays, Cahoot (Abbey National) and Halifax to name but three. He examines how British Retail Banks are approaching the mitigation of operational risk.

“There is evidence to suggest that decision process involves a complex series of interactions between people, systems and technology and that a number of barriers exist to effective mitigation”.

Risk Management presents the first comprehensive coverage of these issues in a peer reviewed journal and marks an important watershed in the study and practice of risk.

Note to editors: Dr Clive Smallman can be contacted on 0122 333 9700, Dr Martin Gill 0116 252 5709, Dr Tina McGuinness on 0114 222 3389.


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