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The Journal of Operational Risk has published an online paper looking at the causes and effects of the LIBOR scandal. Arguing that the manipulation of rates was not just the work of a few localised traders, the paper concludes that it was part of business-as-usual in the international money markets and an example of systemic operational risk.
The paper makes interesting reading, both from the perspective of understanding the background to LIBOR rate setting and from the analysis of the rate fixing investigations. But it is perhaps the conclusion and recommendations which will have the greatest impact.
Recognising that “The landscape of banking in many jurisdictions is changing as governments are putting in place new “regulatory architectures” and new regulators, such as the FCA, to monitor and proactively change business conduct by financial institutions;” the paper argues that people-risk management should be implemented in financial institutions as a separate risk area.
This risk management would include
The paper also recommends the development of a “robust risk culture” which would translate the “lofty sentiments at board level” into action at the lowest level of organisations. Acknowledging that this would not be easy in a large organisation in which sub-cultures often exist which do not always reflect the overall culture promoted by the board, the paper suggests that a “people mapping” exercise to identify conflicts of interests, power relationships and incentives should be a requirement of risk management practices.