Operational Risk Management in HSBC

Assessing the impact of operational risk
management on performance of banks- A case
study of HSBC, UK
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Abstract
Operational risk for a bank is very important as it is associated with bank's daily
operational activities. It occurs because of inclusion of poor skilled workforce, failed
internal system and other related aspect. This in result affect organizational
performance as operation risk management practices deal with several kind of risk such
as internal, external fraud and employment practices as well as workplace safety.
The main objective for conducting the study is to determine the impact of
operational risk management on performance of bank, named HSBC. This particular
study shed light on issues which are being faced by corporation its operation and its
potential impact on overall performance. Here, the case study of HSBC has been
considered under dissertation as it is leading corporation of UK banking sector and
represent the industry. It is the British-based multinational banking which offers financial
services to large number of buyers. This is considered as world's fourth largest bank by
total assets and presently it operates in 71 countries and territories. The cited
organization has four business groups retail banking and wealth management as well
as global banking along with investment banking. Owing to this, case study of HSBC will
be effective for assessing the significance of operational risk management on
performance of bank.
In order to conduct in-depth analysis, qualitative type of research investigation
has been applied in the research. Accordingly both primary and secondary information
are collected. Furthermore, thematic analysis has been used for dissemination of
outcome gathered from collection of information in the direction of aim and objectives.
The findings of study shows that company is facing operational issues such as
money laundering, related to KYC which can be overcome by using effective strategies.
Owing to this, centralized data system, acceptable level of record keeping and
appropriate system are applied.
According to the outcome of the study, it can be suggested organization should
have strong risk culture for mitigation of risk. However, workforce must be skilled and
competent for resoling issues related to operation risk. Apart from this, guidelines set by
Basel and other related authorities should be complied by bank for successful
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operation. Furthermore, it can also be suggested that specific aspect like impact of
forensic audit in detecting fraud in banking sector of UK can also be carried out.
Moreover, focus should be laid on significance of internal audit in detecting fraud in
different banking sector of UK. In addition to this, comparative analysis should be done
that how other banks are using internal audit as imperative tool for maintaining good
performance in the marketplace. At this juncture, quantitative aspect can be selected for
getting more better results.
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TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION.........................................................................................7
1.1 Overview & Background...........................................................................................7
1.2 Rationale of study....................................................................................................9
1.3 Research aim and objectives.................................................................................10
1.4 Significance of study..............................................................................................11
1.5 Limitation of research.............................................................................................12
1.6 Structure of dissertation.........................................................................................12
CHAPTER 2:LITERATURE REVIEW..............................................................................14
2.1 Introduction............................................................................................................14
2.2 Concept of operational risk management in banking sector.................................14
2.3 Sound operational risk management using three line defence model...................15
2.4 Tools and techniques for mitigating risk................................................................18
2.5 Key theoretical issues............................................................................................20
2.6 assessing different types of operational risk associated with HSBC bank of UK..22
2.7 Identifying regulations associated with managing operational risk in HSBC bank of
UK.................................................................................................................................26
2.8 Principle for the operation risk management (Basel committee on banking
supervision)..................................................................................................................28
2.9 Conclusion..............................................................................................................30
CHAPTER 3: RESEACH METHODOLOGY ...................................................................31
3.1 Introduction............................................................................................................31
3.2 Research philosophy..............................................................................................31
3.3 Research approach................................................................................................32
3.4 Research design....................................................................................................32
3.5 Research type........................................................................................................33
3.6 Data collection........................................................................................................33
3.7 Sampling approach ...............................................................................................34
3.8 Data analysis..........................................................................................................35
3.9 Ethical consideration..............................................................................................35
3.10 Conclusion...........................................................................................................36
CHAPTER 4: DATA DESCRIPTION...............................................................................38
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4.1 Introduction............................................................................................................38
4.2 Research limitation................................................................................................38
4.3 Problem suggestions..............................................................................................39
4.4 Conclusion..............................................................................................................49
CHAPTER 5: DATA ANALYSIS......................................................................................50
5.1 Introduction............................................................................................................50
5.2 Thematic analysis..................................................................................................50
5.3 Analysis of primary data.........................................................................................50
5.4 Analysis from secondary data................................................................................55
5.5 Conclusion..............................................................................................................61
CHAPTER 6: CONCLUSION AND RECOMMENDATION..............................................62
6.1 Conclusion..............................................................................................................62
6.2 Recommendation...................................................................................................64
6.3 Recommendation for further research...................................................................65
REFERENCES................................................................................................................67
APPENDIX: QUESTIONNAIRE.......................................................................................76
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List of figures
Illustration 1: Line of defence...........................................................................................13
Illustration 2: Risk mitigate tools......................................................................................15
Illustration 3: Risk loss events.........................................................................................18
Illustration 4: Operational risks in Banking......................................................................20
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List of abbreviations
 HSBC- Hongkong and Shanghai Banking Corporation
 IT- Information Technology
 UK- United Kingdom
 CORF- Corporation operational risk management function
 KRIs- Key Risk Indicator
 PRA- Prudential Regulation Authority
 FCA- Financial Conduct Authority
 MIS- Management information system
 CSR- Corporate social responsibilities
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CHAPTER 1: INTRODUCTION
1.1 Overview & Background
Banking sector is the most important aspect behind growth and development of a
nation. It supports in effective management of financial activities and ensure proper
circulation of money for industrial development. Banks face different kind of risk such as
market, credit and operational which are effectively managed and understood but the
issues exist with operational risk (Sun and Chang, 2011). Earlier, operational risk was
commonly defined as every type of unquantifiable risk which are being faced by a bank.
However, operational risk is referred as the risk of monetary losses due to inadequate
or failed internal processes, systems and people. Furthermore, external events also
create operational risk for organization and affect performance of the same to a great
extent. Moreover, external events such as a natural disaster which tends to affect
physical assets or electrical or telecommunications failures. It spoils overall business of
corporation because recovery takes relatively longer time (Fethi and Pasiouras, 2010).
Similarly, operational risk is also faced in term of employee fraud and product flaws
through which rate of return of firm may be decreased.
The role of operational risk is very important in an organization and better
mitigation of the same will bring the appropriate outcome. In this manner, a company
suffering from issues of lack of profitability and low sales turnover can easily manage all
business activities. It assists business entities to focus upon specific issues which are
creating issues in successful operation of business. However, credit risk and marketing
risk are estimated for future time span because they are closely related to financial
performance of banks (Pagach and Warr, 2010). In the same manner, operational risk
of banks is also estimated in order to resolve some of the major issues creating barriers
in creating competitive edge of the business. Many a times, banks get issues related to
fraudulent activities because incompetent workforce and failed software or technologies
(Gillet, Hübner and Plunus, 2010). This are considered as the specific operational
issues affect business of banks to a great extent. The issues of poor management of
internal activities or processes tend to increase operation risk as it increases chance of
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