Operational Risk Management Problems

Operational Risk Management Problems
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Operational Risk Management Problems
For over a long time, the business world has always been affected by crises, most of which have great economic impacts. Good examples of such crises are the 1987 Black Monday crisis and the 2010 Flash Crash. The Black Monday crisis refers to the unexpected crash of the stock market that took place in the year 1987 in the month of October 19. The crash was sudden and severe and its impact was felt globally. Within a single day that is otherwise referred to as the Black Monday, the United States’ Dow Jones Industrial Average (DJIA) fell by close to 22% or 508 points, which was the biggest single-day drop in history (Nations, 2017). Because of this unexpected crash, there were growing fears all over the world about an extended economic instability. Just before the crash, there was increasing pressure from the customers who wished to redeem their shares whereas the firms had far smaller cash reserves. This pressurized the firms to sell their shares in large volumes and by Monday an imbalance was seen between the buy orders and sell orders volume thereby leading to the fall of the stock prices.
Almost similar to the Black Monday Crash was the Flash Crash that happened in 2010 on the 6th day of May. The main trigger of the Flash Crash was the fact that many firms began selling their securities heavily in large volumes and at a rapid pace in an effort to avoid losses due to the changes in the market at the time. On this day, a very large order was placed and since the number of buyers in the market at the time was inadequate, it led to the market being overwhelmed. As a result of this, liquidity evaporated leading to a great drop in the prices in what was known as the flash crash. Ideally, because of this, some of the major stock indices in the United States such as Dow Jones Industrial Average (DJIA), Nasdaq Composite Index and S&P 500, saw a crash in their stock market but they were able to bounce back in less than an hour. For instance, in only 10 minutes, the DJIA had lost over 1000 points (Nations, 2017). Generally, more than 1 trillion dollars was evaporated in equity during this flash crash even though 70% of the same could be regained in the same day.
Crises such as the 1987 Black Monday crash and the Flash crash of 2010 would have a major impact on any organization especially the bank. One way that a banking organization can be impacted by a flash crash is that the bank would lose most of its investors. This is considering that with the flash crash in 2010, investors lost confidence in the stock markets and because of this, most of them sought to redeem their shares in a manner that led to the plummeting of the stock markets. With investors losing their confidence in firms, it means that this would affect even an organization such as a bank where people often invest. The stock market has a heavy impact on the bank in that in a rising stock market, there is an increase in the economic activities, meaning that more money is borrowed for consumer purchases and capital investment by businesses and consumers. A falling stock market often means that there is a decrease in economic activities and this can cause consumers and...