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Operational Risk Management Guide

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems or external events. It includes internal fraud, external fraud, employment practices, clients, products, business disruption, system failures, and execution errors. Banks must identify, assess, monitor, control, and mitigate operational risks. There are three approaches to operational risk management - the standardized approach which uses a single risk indicator to calculate capital charges, the basic indicator approach which uses gross income to determine capital, and advanced measurement approaches which use internal models to quantify operational risk. Proper identification, assessment, measurement, monitoring, reporting, control and management processes are needed to effectively manage operational risks.

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605 views18 pages

Operational Risk Management Guide

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems or external events. It includes internal fraud, external fraud, employment practices, clients, products, business disruption, system failures, and execution errors. Banks must identify, assess, monitor, control, and mitigate operational risks. There are three approaches to operational risk management - the standardized approach which uses a single risk indicator to calculate capital charges, the basic indicator approach which uses gross income to determine capital, and advanced measurement approaches which use internal models to quantify operational risk. Proper identification, assessment, measurement, monitoring, reporting, control and management processes are needed to effectively manage operational risks.

Uploaded by

SomalKant
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

Operational Risk

Management

Definitions

Operational risk (OpRisk)has been defined by the


Basel Committee on Banking Supervision as the
risk of loss resulting from inadequate or failed
internal processes, people and systems or from
external events.

Management of Operational Risk means and


includes identification, assessment, monitoring
and control/mitigation of this risk.

Causes of OpRisk

Internal fraud
External fraud
Employment practices and workplace safety
Clients, products and business practices.
Damage to physical assets.
Business disruption and system failures
Execution, delivery and process management

Causes of OpRisk
Highly Automated Technology
Emergence of E- Commerce
Emergence of banks acting as very large
volume service providers
Outsourcing
Large-scale acquisitions, mergers, de-mergers
and consolidations
Engagement in risk mitigation techniques
giving rise to legal risk

Contributors to OpRisk

People Risk
Process Risk
Transaction Risk
Documentation/contract risk.
Operational Control Risk
Model Risk
Systems Risk
Technology Risk MIS Risk.
Legal and Regulatory Risk
Event Risk

OpRisk Management process

Appropriate policies and procedures


Efforts to identify and measure operational risk
Effective monitoring and reporting
A sound system of internal controls, and
Appropriate testing and verification of the
Operational Risk Framework

Concept of Gross Income

The Basel Committee has allowed each relevant


national supervisor to define gross income. RBI
defines gross income as follows,

Gross income = Net profit (+) Provisions &


Contingencies (+) operating expenses (Schedule
16) (-) profit on sale of HTM investments (-)
income from insurance (-) extraordinary /
irregular item of income (+) loss on sale of HTM
investments

Computation of Capital Charge


Standardized
Capital change based on
single risk indicator
Foundation
Operational
Capital based on business
Risk and industry standards
lines
Advanced
Capital based on business
lines and internally
calculated standards

OpRisk Approaches

OpRisk Approaches

Standardized Approach--Capital Charge

Corporate finance Gross income b1


Trading and sales Gross income b2
Retail banking Gross income b3
Commercial banking Gross income
b4
Payment and settlement Gross
income
b5
Agency services Gross income b6
Asset management Gross income
b7
Retail brokerage Gross income b8

18

18

12

15

18

15

12

12

Recognizing/Assessing Risk Events


(i) Experience - The event has occurred in the past
(ii) Judgment - Business logic suggests that it is a risk
(iii) Intuition - Events where appropriate measures
saved the institution in the nick of time
(iv) Linked Events - This event resulted in a loss
resulting from other risk type (credit, market etc.)
(v) Regulatory requirement
ASSESSMENT
Self assessment
Risk mapping
Key Risk indicators

Factors: Assessing Potential risk areas


(i) Staff related factors such as productivity,
expertise, turnover
(ii) Extent of activity outsourced
(iii) Process clarity, complexity, changes
(iv) IT Indices
(v) Audit Scores
(vi) Expected changes or spurts in volumes

Risk Measurement: Basis


(i) Total number of risk events
(ii) Total financial reversals
(iii) Net financial impact
(iv) Exposure: Based on expected increase in
volumes
(v) Total number of customer claims paid out
(vi) IT indices: Uptime etc.
(vii) Office Accounts Status: such as changes in
balances

Monitoring Operational Risk--Issues


Operational loss events
Identification of appropriate indicators
Frequency of monitoring and reporting
MIS
Business line identification
Corporate finance,
Trading and sales,
Retail banking,
Commercial banking,
Payment and settlement , Agency services,
Asset management, and
Retail brokerage.

OpRisk Management & Data Needs


Data Collected

Data Types
Transactional
Operational/CRM
Analytical
Risk management
Economy/Industry

Loss Event Data

Causal Data

Loss Effect

Key Risk Indicators (KRIs)

Proxies

Risk Inventories

Structured Self Assessment


Data

External Data

Management tasks

Decision whether control for risk minimization or


bear
Risk mitigation tools as complementary to control
Investment in technology and Information security
Outsourcing policy-- development and adoption
Impact of operational break downs and loss---intra
and outside bank
Business Continuity plans and testing
Review of Business Continuity plans

Organisational Set-up

Board of Directors
Risk Management Committee of the Board
Operational Risk Management Committee
Operational Risk Management Department
Operational Risk Managers
Support Group for operational risk
management

Operational Risk Management
Definitions Operational risk (OpRisk)has been defined by the Basel Committee on Banking Supervision as the risk of loss r
Causes of OpRisk Internal fraud External fraud Employment practices and workplace safety Clients, products and business
Causes of OpRisk Highly Automated Technology Emergence of E- Commerce Emergence of banks acting as very large volume
Contributors to OpRisk People Risk Process Risk – Transaction Risk – Documentation/contract risk. – Operational Control Ri
OpRisk Management process • Appropriate policies and procedures • Efforts to identify and measure operational risk • Effectiv
Concept of Gross Income • The Basel Committee has allowed each relevant national supervisor to define gross income. RBI def
Computation of Capital Charge Operational Risk Standardized Capital change based on single risk indicator Foundation Capit
OpRisk Approaches
OpRisk Approaches

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