operational risk management under basel ii & basel iii

OPERATIONAL RISK UNDER BASEL II & III

Presentation by Eneni Oduwole

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Outline

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Evolution of Basel Guidelines

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Focus of the Basel II Framework

• Provide a standard for bank regulators to ascertain capital required by banks to guard against exposures to financial and operational risks thus promoting safety and soundness

• Maintain reasonable regulatory consistency for internationally active banks

• Protect the international financial system from insolvency, collapse and systemic risk by ensuring that risk taking is commensurate with the amount of capital held by banks as safeguard for insolvency

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Drivers of Basel II

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Refresher: What is Operational Risk (OpRisk)?

• ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’…Basel Definition

• It comprises 7 loss types, namely: Internal Fraud; External Fraud; Business Practices; System Failures; Execution & Delivery; Damage to Physical Assets; Employee Practices

• Losses are categorized as either Actual or Near-Misses (Potential and Prevented)

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

OpRisk Under Basel II

• Conduct of Risk Control Self Assessments (Discussed)

• Monitoring of Key Risk Indicators (Discussed)

• Collation of Loss Data (Discussed)

• Maintenance of Risk Registers (Discussed)

• Estimation of Economic Capital

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

OpRisk Capital Estimation Under Basel II

• Estimation of Economic Capital using any of these approaches that is suitable for the business model and maturity of the institution:

‒ Basic Indicator Approach (BIA)

‒ The Standardized Approach (TSA)

‒ Advanced Measurement Approach (AMA)

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Pillar 1 for OpRisk

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Measuring OpRisk Under Basel II

Business Line Internal Environment

Objective Setting

Event Identification

Risk Assessment

Risk Response

Control Activities

Info. & Comms.

Monitoring Overall

Corporate Finance

Trading & Sales

Commercial Banking

Payment & Settlements

Agency Services

Asset Management

Retail Brokerage

Governance Issues

General OpRisk Mgt

Overall Rating

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Pitfalls of Basel II

• Emphasis on regulatory compliance as against prudent business practices

• Reliance on data and risk measurement

• Focused mainly on Credit Risk Management

• Poor definition of risk tolerance levels and benchmarks for decision-making

• Incorrect risk aggregation stemming from weak risk correlations

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Focus of Basel III

• Increased capital requirements by raising the quality, consistency and transparency of an institution’s capital base

• Increased risk coverage for the trading book and complex transactions

• Introduction of leverage ratio as supplement for Basel II requirements

• Promoting stronger provisioning for future business activities

• Introduce liquidity coverage ratio and net stable funding ratio that would assure higher probabilities of solvency

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

OpRisk Challenge

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FBN CCPD, 2014 (ORGANIZED BY CIBN)

Way Forward for Effective OpRisk Mgt

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Thank You…Eneni Oduwole

eneni.oduwole@dangote.com

Tel: 234-8033045896