Operational Risk and the Three Lines of Defence in UK Financial Institutions: Is Three Really the Magic Number?

18 Pages Posted: 14 Feb 2017

See all articles by Kumbirai Mabwe

Kumbirai Mabwe

University of South Wales

Patrick Ring

Glasgow Caledonian University

Robert Webb

University of Nottingham

Date Written: February 14, 2017

Abstract

Interest in financial services firms developing and implementing robust systems and structures to manage operational risk has been growing. While there now appears to be some consensus in terms of definitions, quantification and modeling, firms are struggling with the qualitative side of operational risk management (ORM). This is particularly the case for financial institutions’ operational risk governance, where the three lines of defence model has become standardized. At the same time, corporate scandals post-financial crisis continue to indicate deficiencies in operational risk governance. Our paper examines the three lines of defence in the context of ORM in UK financial institutions. It focuses on roles and responsibilities and then analyzes the effectiveness of the traditional three lines of defence model. We find a lack of common understanding of the lines of defence in financial institutions, which leads to the duplication of roles and gaps in coverage. This is concerning for the industry, the economy and regulators.

Keywords: operational risk, risk management, three lines of defence, financial institutions, risk governance

Suggested Citation

Mabwe, Kumbirai and Ring, Patrick and Webb, Robert, Operational Risk and the Three Lines of Defence in UK Financial Institutions: Is Three Really the Magic Number? (February 14, 2017). Journal of Operational Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2916653

Kumbirai Mabwe (Contact Author)

University of South Wales ( email )

Caerleon Campus
Lodge Road
Pontypridd, Wales CF37 1DL
United Kingdom

Patrick Ring

Glasgow Caledonian University ( email )

City Campus
Cowcaddens Road
Glasgow G4 0BA, Scotland
United Kingdom

Robert Webb

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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