OPERATIONAL RISK MANAGEMENT by S.K.

BAGCHI

Presented by Vikram Singh Rautela Paromita Mandal Milan Thomas

About the Author

Mr. S.K.Bagchi holds a no. of professional qualifications in banking and finance. He has experience of over three decades mostly in credit and industrial finance. He was Vice Principal and Chief Credit Faculty at All-India Staff College of Bank of Baroda. He is presently Professor , banking and finance at NMIMS University, Mumbai Other books by Mr. S.K.Bagchi Treasury Risk Management Credit Risk Management Bank Finance for Small and Medium Enterprise

Risk the new way of life

When written in Chinese the word crisis is composed to two characters. One represents danger, and the other represents opportunity. John F. Kennedy Uncertainty and expectation are the joys of life. William Congreve

Risk! Risk! Risk!

Risk the new way of life

Living at risk is jumping off the cliff and building your wings on the way down. Ray Bradbury Its inevitable!

Managing Risk
Risk management is the identification, assessment, and prioritization of risk (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

Operational Risk

Risk Management

Credit Risk

Market Risk

Operational risk the risk of loss!

Operational risk

Internal factors

External factors

Process

People

System

Natural calamites, Business environment

Why focus on operational risk management?

Ongoing spate of financial deregulation and globalization Influence of technology and automation in managing business machines and softwares cant think! Complex organizational structures arising from mergers/demergers etc. Opportunities for business process outsourcing Growing complexities of products/services (specially banks in this book) With liberalization and globalization, banks vie very hard with each other for business Basel Accord II guidelines require, for the first time, capital allocation for operational risk

Risk process conceptual overview

Identification: Cause-event-effect analysis on operational risk

Cause 1. People-related unauthorized/unlawful activity, internal/external Event Theft and fraud Effect Financial loss of the organization if not recoverable from the perpetrators.

2. Employment relations
3. Suitability/ disclosure issues, fiduciary breaches 4. Natural disaster. eg. Flood, Non- natural event eg. Terrorist attack.

Employment practices and workplace safety

Clients, products and business practices Damage to physical assets eg. Building, plant and machinery.

Compensation claim on the organization

Loss of future potential and sometimes, may even be customer claims. Financial loss of the organization unless appropriate risk mitigant eg. Insurance is available. Financial loss due disruption in working. Financial loss within the organization/ counter claims.

5. System issues eg. Hardware, Business disruption and Software etc. system failures. 6. Internal process error, miscommunications etc. Process Management.

Model organizational structure for ORM in a bank

Board of Directors

ORM Committee (SUB-Committee of Board

Chief risk officer/GM Risk Management

OR Identification cell

OR Measurement cell

OR Monitoring cell

OR/control/mitigation cell

ORM

Take aways
In order to efficiently face this new challenge in Risk Management the prerequisites are creation of risk culture enterprise wise operational risk awareness

Proactive steps at all the levels of operations will operate as a safety valve and in the process may facilitate low risk capital charge

THANK YOU