The Operational Risk Management Framework by Edu Pristine

Author of lecture The Operational Risk Management Framework

Edu Pristine

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... List the emerging Operational Risks in Banks. Discuss main types of losses that occurred in practice. Define Operational Risk. Describe the Operational Risk Advanced Measurement Approach (AMA) Framework ...

... of loss Resulting from any inadequate or failed internal process, people & system or from external events potential loss, forward looking casual categories: employee behaviour, corporate behaviour, information technology, external enviorment force majeure. “People and system” in the regulatory definition are captured in internal ...

... errors to system failure risks, as greater reliance is placed on globally integrated systems. Growth of e-commerce brings with it potential risks (e.g., internal and external fraud and system security issues) that are not yet fully understood. Large-scale acquisitions, mergers, demergers and consolidations test the viability of new or newly integrated ...

... failure to meet a professional obligation to clients like improper business practice, product flaws or failure to meet disclosure & fiduciary, from natural disasters and external sources, related to hardware, software etc. failed transaction processing, monitoring, reporting, etc. Employee ...

... words ‘operational risk’ mean to the institution. 2. To avoid potential catastrophic losses. 3. To enable the institution to anticipate all kinds of risks more effectively, thereby preventing failures from happening. 4. To generate a broader understanding of ...

... identify business units in the institution with high volumes, high turnover (i.e., transactions per unit time), high degree of structural change, and highly complex support systems. Such business units are especially susceptible to ...

... and contractual documentation, e.g., ISDA master agreements; collateral management; and general processing and payment/settlement errors. Reconciliation and accounting: Enables the institution to identify areas of inefficient capital allocation. Change and new activities: In responding to rapid ...

... People: People also contribute a myriad of problems through: human error; fraud, lack of honesty and integrity; lack of cooperation and teamwork; in-fighting, jealousies, and rumour-mongering; personal sabotage and so on. Client relationships: An institution derives much ...

... management and supervision of operational risk. The guidelines are intended to serve as best or sound practices within the financial industry. The Committee also recognizes that ‘internal operational risk culture is taken to mean the combined set of individual ...

... that the management of risk is comprised of four important complementary activities. Role of supervisors: Emphasises the important role regulatory supervisors play in the risk management process of financial institutions. ...

... equal to 15% (called factor) of average gross income over the past 3 years (if gross income is -ive in a year, it is ignored). This method is simplest to implement but wrongly assumes that OR changes with business size (proxied by gross income levels). Standardized approach: Bank ...

... Loss distribution for a particular cell in ‘Loss type – Business Line’ matrix is derived from: Frequency distribution: how frequently a particular OR loss type occurring in a business line (similar to PD in credit risk). Frequency distribution either is based on internal and external loss data or qualitative assessment by a business line (called Risk self-assessment) ...

... Fraud employment practices & work place safety clients, products & business practices damage to physical assets business ...

... is true that the business activities sharing these characteristics have the greatest exposure to operational risk failures. Nevertheless, other business activities could potentially sustain economic losses of similar magnitude. The goal of operational risk management must be to focus on internal processes (as opposed to external events) since only ...

... to discover that even the most obvious types of operational risk are widely prevalent within the organisation, unnecessarily squandering precious resources and hindering productivity. The first step in ...

... is assessed. Review and Validation: Operational Risk Management Committee (ORMC) should review and validate risk assessment procedure and output. Output of Risk Assessment Process: Output maybe in form of: Improved risk reporting and analysis: say, using a heat map, we can identify ...

... many delays in systems development; disrespect for audit reports; and ignorance. (ii) Inadequate assessment of risk: on and off-balance sheet activities: lack of stress-testing for unexpected market moves; inappropriate setting of limits; too much risk relative to capital; and lack of risk-adjusted return measurement. (iii) Lack of ...