Assessing Operational Risk Management at HSBC Bank, UK: Case Study

This case study examines the impact of operational risk management on the performance of HSBC, a leading UK-based multinational banking corporation. The study explores various aspects of operational risk, including internal and external fraud, employee practices, and system failures. The research employs a qualitative approach, utilizing primary and secondary data collection methods, and thematic analysis to evaluate the effectiveness of HSBC's risk management strategies. Key findings highlight the importance of strong risk culture, skilled workforce, and compliance with regulatory guidelines such as those set by Basel. The study recommends strategies such as centralized data systems and robust record-keeping to mitigate risks like money laundering and KYC issues, while also suggesting further research into forensic audits and internal audit practices within the UK banking sector. The analysis emphasizes the significance of operational risk management in maintaining financial stability and improving overall bank performance.

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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fraud etc. This is also the reason of unexpected loss because greater the operation risk,
the greater the losses which was not expected.
Furthermore, effect of not complying regulations, appropriate law as well as
implicit rules is also the reason behind higher operational risk. However, this is not the
only way to reduced the same because management should continuous supervise all
working affairs. In such manner corporation can integrate all business activities and risk
associated with operational activities will be reduced to a great extent (Olweny and
Shipho, 2011).
Present report is based on HSBC, British-based multinational banking and
financial services company. This is considered as world's fourth largest bank in term of
total assets. It has operation across 71 countries with 6000 offices. The business
groups of banks consist of retail banking and wealth management, commercial banking
as well as global private banking. In addition to this, investment banking is also included
for the purpose of meeting organizational objectives by increasing customer base. It
facilitates to provide variety of services to end users and meet their expectations in an
effectual manner. Moreover, HSBC is listed on Hong Kong Stock Exchange and London
Stock Exchange. Operation of banks in number of countries creates issues in
successful management of business activities. Owing to this, issues like fraud, poor
management and other related negative aspect might occur at workplace. For this
purpose, effective operational risk management practices are implemented by the
management to assess risk along with corrective action (Sun and Chang, 2011).
The organization like HSBC manages the risk by assigning qualified personnel
and IT expert along with keen attention of internal systems (Hasan and Dridi, 2010).
This aspect play important role in managing business of bank in all of its branches as it
is expanded in many countries. In such manner, management focuses upon highlighting
appropriate alternative for effective internal management of business transaction.
However, organization follow regulatory standard for its ethical conduct of business
through which business meet expectations of all its stakeholders (Fiordelisi and
Molyneux, 2010). In the same manner, training and learning program are conducted for
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employees so they can learn regarding regulations and procedures applied in internal
management of business.
1.2 Rationale of study
In the current era banking sector has issue of compliance of regulatory
framework. It is because business entities must work in the boundary of regulatory
framework so that accordingly ethical standard can be ensured. Owing to this, 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. For this purpose, researcher conducts in-depth study for assessing
the importance of operational risk management in reducing the risk for bank and
ensures their successful operation. It focuses upon detail discussion of effective
management of risk related to operation activities which are used by banks. Also, it will
be effective in assessing the importance of different strategies and tools applied by
management of bank for resolving such kind of issues.
The study on assessing the impact on operational risk management in banking
sector also provides suggestions to improve the performance. At this juncture, different
objectives are taken into consideration such as concept of operational risk management
along with discussion on different types of risk associated with selected corporation.
However, banks are to work in the regulatory boundary for ensuring their ethical
conduct. It proves to be effective to meet expectations of stakeholders and standard
which are set for long run growth. Owing to this, regulations associated with managing
operational risk in HSBC bank of UK are also explained which in turn business can
satisfy buyers.
The main purpose behind carrying out the study is to identify the importance of
operational risk management for banks. It will also be studied that how these strategies
are applied by business for reducing overall risk. If such kinds of strategies are
effectively implemented at workplace then banks like HSBC can easily detect the risk. It
is also effective for increasing sales turnover and increasing customer base for banking
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sector operating in UK. Overall study focuses upon assessing impact different
operational risk management on performance of bank.
1.3 Research aim and objectives
Aim and objectives of any study are very important which provide information
related to purpose of the study in clear manner. Research aim for study on operational
risk management is mentioned as follows-
Aim- To determine the impact of operational risk management on performance of
banks: A case study of HSBC, UK
Objectives-
The objectives of current study are explained as follows. With the help of
research objectives, appropriate outcome is drawn that proves to be effective for
meeting research purpose. The objectives of study are framed in accordance with aim
so it ease to accomplish the same.
 To understand the concept of operational risk management in banking sector.
 To assess different types of operational risk associated with HSBC bank of UK
 To identify the regulations associated with managing operational risk in HSBC
bank of UK To recommend different ways for reducing operational risk in HSBC bank of UK
Research question
Research questions are formed on the basis of research objectives through
which it becomes convenient for researcher to collect large amount of information. The
research questions for current study on impact of operational risk management in
banking sector are listed as follows-
 What is the concept of operational risk management in banking sector?
 What are different types of operational risk associated with HSBC bank of UK?
 What are regulations associated with managing operational risk in HSBC bank of
UK?
 What suggestions with regard to different ways for reducing operational risk in
HSBC bank of UK?
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1.4 Significance of study
The current study is very essential for determining the impact of operational risk
management on performance of banks. With completion of the current report, HSBC will
come to know different measures that can be applied for detecting risk on right time. It
facilitates to ensure free flow of transaction and expectations of clients can also be met
effectively. With the assessment of regulation affecting business corporation, it
becomes effective to comply with the same by bringing modification in internal work
environment. Furthermore, with the collection of secondary information in the study,
researcher also highlights overall risk associated with business which tends to affect
overall corporation activities. The study will also come out with meaningful outcome
which can be applied in banking to reduce operational risk
Furthermore, focus will be laid on impact on operational risk on business
operation so that accordingly barriers associated with the same can be identified. In this
manner, current study will be effective for HSBC bank to resolve operational issues by
focusing upon problems. However, present study will help number of parties because
researcher work will provide them assistance in different manner. It has been explained
as follows-
 People who belong to the field of academics and preparing themselves for Ph. D
and other degrees will get greater help from the present study on impact of
operational risk. Furthermore, study will be effective in gaining deep
understanding with regard to concept of operational risk management and its
impact on business performance.
 Study will impart overview to the analyst in terms of assessing various measures
of operational risk management as used by HSBC
 The current dissertation will also assist people associated with the field of
literature in providing right direction with the evidence of good amount of
information.
 Therefore, current study is significant for entire sector of banking operating in UK
and along with different parties associated in the same field. This proves to be
effective to become great source of their information.
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