How to reduce risks in financial business

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One of the most commonly used tools or tools is FMEA , or Failure Mode and Effect Analysis . FMEA is an anti-error tool used in the implementation of the Lean Six Sigma method, which is to "examine and examine in great detail the why and how things can deviate from expectations (potentially failing)."The Lean Six Sigma application in the banking and financial services industry is complemented by the utilization of various tools in every phase of DMAIC from its projects.

In a Lean Six Sigma-based program, FMEA is performed systematically:

• Identify potential failure / error product or process


• Records the effects that will arise if there is actually a failure / error


• Discover the potential causes of the error and the risks posed


• Make a list and prioritize actions that can be done to reduce the risk of failure / error.

Control Chart or Shewhart Chart (or process behavior chart ), is a tool often used in the Lean Six Sigma program to determine whether a process is in a statistical control. Control chart will provide guidance in making improvements to the process. In the risk management area, Control Chart can be used as a tool to monitor risk. The following is the translation of FMEA utilization and Control Chart in the risk management domain.

FMEA Tools Utilization for Risk Control

The banking and financial organizations are always under pressure to streamline their operational costs, while simultaneously expected to always comply with increasingly stringent regulations amid the global financial crisis. But the banking and financial organizations have been increasingly vigilant in risk management practices, as fraudulent scandalous issues such as illicit trafficking and fraud are prevalent. These organizations have knowledge of useful tools to reduce operational risk, and simultaneously save costs, Lean Six Sigma.

Minimizing Operational Risk

Operational risk is probably the most significant face by banking and financial companies. In the last two decades, almost all the major losses suffer by financial firms are cause by operational errors, such as those experienced by Enron and Baring Bank. Therefore, operational risks must be addressed and dealt with properly.

Base on the definition issue by Basel *) II Committee, operational risk is the risk of loss caused by failure or weakness of internal processes, ie human resources and system, or from external events. Included in operational risk are:

• Internal fraud


• External fraud


• Employee workplace violation and workplace safety


• Business client, product, or protocol violations


• Damage to physical assets


• Business interruptions and system failures


• Failure of execution, delivery and management processes.

Challenges in Minimizing Operational Risk

Any kind of variation that occurs in banking and finance, whether in the form of portfolio return, transaction result or KPI performance, is consider as a risk. During routine day-to-day transactions, banking and financial companies face several challenges in managing operational risks.

Financial processes are essentially complex processes. Such processes are often in contact with many geographical functions and constraints. Therefore, such financial processes are prone to errors or failures, and this is the delicate consideration of a risk manager to identify some important events . Monitoring the cause of these risks is also the job of a risk manager, which is certainly not easy at all.

Lean Six Sigma and Operational Risk Management

Lean Six Sigma is a useful methodology for reducing process variation. This method offers an excellent opportunity for financial and banking companies to facilitate risk management in their operations. One of the most useful Lean Six Sigma tools to help manage operational risk is FMEA and Control Chart, which will be discuss later.

FMEA As A Tool for Identifying and Prioritizing Risks

FMEA is an excellent tool for managing operational risks in financial and banking companies. A risk manager can use FMEA to create a list of failure points in the process, which have the greatest risk. After that, he can set the list priority according to the level of risk and impact that will be generate, the potential frequency of occurrence, and the ease of detection of the failure events. FMEA can also work for the development of mitigation planning for high-risk events.

The main benefits of FMEA in operational risk management are:

• Helps to list failure points in the process


• Helps define uniform criteria for prioritizing risk-taking events


• Help develop mitigation planning for events with risks that are in the top priority.

Then how to use FMEA to get the above benefits? Consider the FMEA utilization simulation for the following ATM bank operations:

FMEA Case Study on Bank ATM Machine Operations

The following is a parable of FMEA utilization on the ATM machine operate by a bank. In this case study, only two steps of the process are consider in ATM machine operations, namely ATM pin authentication and Money Dispenser. This concept can be develop and use in most banking processes.

Step Process	Potential Failure Mode	Potential Failure Effect	SEV	Potential Causes	OCC	Current Control Process	DET	RPN	Action Recommendations
ATM pin authentication	Access is denied	The machine refuses withdrawals.The customer is very dissatisfied	8	ATM card lost or stolen	3	ATM cards are automatically block when the 3-times authentication process fails.	3	72
	Authentication failure	Customer is upset.	3	Network interruption	5	Attach load balance to balance workload across the network.	5	75
Money Dispenser	Money can not get out	Customer is not satisfy	7	ATM runs out of money	7	Internal notification if the money in the ATM machine is running low	4	196	Increase the amount of money in cash machines with high traffic to prevent money quickly run out.
	The account was debit, but the money did not come out	The customer is very dissatisfy	8	Transaction failure due to network interruption	3	Attach load balance to balance workload across the network.	4	96
	Money goes out more than the amount should be	Banks suffer losses	8	One bill piles up with other bills.Bill stack in the wrong pile of denominations	2		3	48

In ATM machine operations generally, ATM pin authentication process can fail because of two potential things: Unauthorized access and Authentication failure . Unauthorized access has the potential to cause high-level customer disappointment, and Authentication failure can lead to the disappointment of middle-level customers. Base on the severity (SEV) of the impact, frequency of occurrence (OCC), and possible detection / detect ability (DET) of a failure event, a risk manager can determine the risk priority number (RPN) of various failure points.

Control Chart as Tool for Risk Monitoring

Banking and finance firms generally use KRI ( Key Risk Indicators ) to determine the level of exposure to operational risk suffer by the organization within a certain time. For example, financial organizations can search for KRIs for customer requests complete on cut-off date to estimate potential liability levels arising from customer complaints, and manage execution, delivery and risk failure processes in accordance with Basel norms.

Currently, KRI reporting and extraction is base on the trigger level specify from the assessment by expert staff. In addition, KRI monitoring can also be support by plotting KRI data points in a control chart .

KRIs that are plot in the control chart will reveal some additional knowledge, such as:

• Indicates the specific patterns or trends found in process performance. This data is a warning signal to come.


• Indicates whether the current controls are sufficient to maintain the ongoing process stability and remain within the prescribe tolerance level.

The example below is a demonstration of the use of a control chart to monitor KRI. In the figure, a KRI figure of the customer's request has been process after the cut-off is plotted in the control chart and he or she picks up some facts: At first glance, KRI performance looks good, because KRI never violate the upper limit (limit of specification) of 50 customer requests set by management.

However, if examine further, the control chart shows a tendency to increase the number of nasabag requests on Week 22 through Week 28. This trend is a signal that this KRI will soon surpass the upper boundary line, and appropriate mitigation is require to maintain control of future KRIs.