OPERATIONAL RISK MANAGEMENT by S.K.

BAGCHI

Presented by – Vikram Singh Rautela Paromita Mandal Milan Thomas

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

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

Risk – the new way of life Living at risk is jumping off the cliff and building your wings on the way down. Ray Bradbury It’s inevitable! .

Operational Risk Risk Management Credit Risk Market Risk . and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. 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. assessment.Managing Risk Risk management is the identification.

Business environment .Operational risk – the risk of loss! Operational risk Internal factors External factors Process People System Natural calamites.

• Opportunities for business process outsourcing • Growing complexities of products/services (specially banks in this book) • With liberalization and globalization. capital allocation for operational risk . for the first time.Why focus on operational risk management? • Ongoing spate of financial deregulation and globalization • Influence of technology and automation in managing business – machines and softwares can’t think! • Complex organizational structures arising from mergers/demergers etc. banks vie very hard with each other for business • Basel Accord II guidelines require.

Risk process – conceptual overview .

Insurance is available.natural event eg. Employment relations 3. 5. . 6. products and business practices Damage to physical assets eg. Financial loss within the organization/ counter claims. 2. Financial loss of the organization unless appropriate risk mitigant eg. Process Management. eg.Identification: Cause-event-effect analysis on operational risk Cause 1. internal/external Event Theft and fraud Effect Financial loss of the organization if not recoverable from the perpetrators. Terrorist attack. System issues eg. People-related unauthorized/unlawful activity. Compensation claim on the organization Loss of future potential and sometimes. system failures. Business disruption and Software etc. may even be customer claims. Flood. Financial loss due disruption in working. fiduciary breaches 4. Building. Suitability/ disclosure issues. Hardware. Non. Internal process error. Employment practices and workplace safety Clients. miscommunications etc. Natural disaster. plant and machinery.

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 .

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