Operational Risk Problems in Banking

Operational Risk Problems
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Question 1
I am more concerned about the loss made by the bank because this loss is unique to the bank meaning that it affects only the bank and cannot be recovered from higher fees or net interest margin. The worry I may have is that the loss is unlikely to earn back, and the bank must put more effort to recover the loss. To recover this loss, the bank may be forced to lose its market share by increasing the costs of its products and services. This is contrary to the loss made by the insurance company because there is a possibility that the hurricane would affect other insurance companies. As a result, all insurance companies would increase premiums to compensate for the loss. In this case, the insurance companies maintain their market share and competitive position.
Question 2
Three examples of cognitive bias are confirmation bias, overconfidence bias and social desirability bias (Nortje, 2020). Confirmation bias results from an ostrich effect, where individuals tend to bury their heads in the sun, pretending that something negative does not exist. This bias allows individuals to selectively interpret information that confirms their previous beliefs. Overconfidence bias results from a person’s false sense of talent, skills and beliefs (Bryson et al., 2016). It is regarded as a dangerous bias that is very productive in financial markets and behavioral finance. It commonly manifests when one has desirability effect: - the belief that something will happen because you want it to happen. Social desirability bias is the tendency of a person to respond in a way they believe is desirable by others instead of choosing responses that reflect their thoughts and feelings (Nortje, 2020).
Question 3
The end-year bonuses have provided incentives for employees to think about short-term because the bonuses are intended to reward employees for attaining the company’s short-term goals. In this case, employees tend to think that the compensation offered to them is to retain them for a short-term and motivate th...