operational risk & incident reporting
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April 13, 2023Kachhapi 1
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OPERATIONAL RISK
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from external events. Also includes, settlement or payment risk and business interruption, administrative and legal risks.
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OPERATIONAL RISK IS
• EMBEDDED IN EACH ACTIVITY
• IMPLICIT IN ORDINARY COURSE OF CORPORATE ACTIVITY.
• NOT DIRECTLY A RISK Vs EXPECTED REWARD FUNCTION
• AN INDEPENDENT RISK MANAGEMENT FUNCTION, COMPARABLE TO MANAGEMENT OF CREDIT & MARKET
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TYPES OF OPERATIONAL RISK EVENTS
EVENT EXAMPLE
Internal FraudInternal Fraud Intentional Mis-representationIntentional Mis-representationEmployee theftEmployee theftInsider Trading - EmployeesInsider Trading - Employees
External Fraud Robbery, Forgery, ChequekitingComputer Hacking Damage
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Clients, Products, Business Practices
Fiduciary BreachesImproper TradingConfidential InformationMoney Laundering Claim
Employment Practices & Work Place Safety
Health & Safety RulesDiscrimination ClaimsGeneral Liability
EVENT EXAMPLE
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EVENT EXAMPLE
Damage to Physical Damage to Physical AssetsAssets
Terrorism, VandalismTerrorism, VandalismEarth Quake, Fires & Earth Quake, Fires & FloodsFloods
Business Disruption & System Failures
Hardware & Software Failures, Telecom Failures, Utility Usage
Execution, Delivery & Process Management
Data Entry Errors, Incomplete Documentation, Vendor Disputes, Unauthorized Access to Client Accounts
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MAJOR CASES OF LOSS MAJOR CASES OF LOSS EVENTS IN BANKINGEVENTS IN BANKING
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LOSS EVENTS TYPE
BANK QUANTUM IN USD
Internal Fraud BaringsDaiwa Bank
$ 1.0 Billion$ 1.4 Billion
External Fraud Custodial Client of Republic of NY Corporation
$ 611 Mio
WORKPLACE SAFETY
Merrill Lynch Legal Settlement
$ 250 Mio
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LOSS EVENTS TYPE
BANK QUANTUM IN USD
Client products & business practices
Improper SalesPractices Banks in US( Provision)
$ 405 Mio
Damage tophysical assets
Bank of NewYork 9/11
$ 140 Mio
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LOSS EVENTS TYPE
BANK QUANTUM IN USD
Business disruption& system failure
Solomon Brothers( Due toUn-reconciledBalances withchange in I.TSystem )
$ 303 Mio
Execution, delivery& Processmanagement
BOA Wells Fargo BankFailed transactionProcessing &System IntegrationProcessing
$ 225 Mio$ 150 Mio
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OPERATIONAL RISK –LOSS TYPES
• Processing risk.
• People risk.
• System risk.
• External events risk.
• Legal risk.
• Reputation risk.
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PROCESSING RISK• Transactions put through without proper
authority/mandate.• Erroneous transaction execution.• Wrong reporting.• Erroneous cash movement.• Omission of task.• Inaccurate/incomplete documentation.• Frauds both internally/externally.• Money laundering.• Unauthorized persons access to bank’s records.
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PEOPLE RISK• Inadequate staff.
• Hiring unsuitable staff.
• Loss of key personnel.
• Over reliance on few key staff.
• Insufficient succession & development planning.
• Insufficient training.
• Poor communication.
• Behaviour & attitude.
• Age profile.
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SYSTEM RISKS• Programming error.• Irrelevant, inaccurate, incomplete MIS.• I T System failure.• Telecommunication failure.• Technology interference.• Failure of support functions.• Inadequacy of backup systems/procedures.• Working under different platforms/ software
environment.
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LEGAL RISKS
• Breaching of regulatory requirements.
• Unenforceable contracts,lawsuits.
• Adverse judgments.
• Executing illegal transactions.
• Failure to fulfill fiduciary duties
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External events risks.
• Natural disasters.Natural disasters.
• War/terrorism.War/terrorism.
• Sabotage.Sabotage.
• Crime.Crime.
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REPUTATION RISKS.• Negative publicity leading to decline in
customer base, costly litigation, reduction in current & prospective earnings & capital.
• Effect of other risks.
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Operational Risk – Framework & Management.
1. Organizational set up.
2. Operational Risk Management Policy.
3. Risk mapping.
4. Risk assessment.
5. Collection of Operational risk loss incident data.
6. Risk Quantification
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Risk AssessmentCategorization of identified risks – Low,
Medium, High.
Grading of controls – Low, Medium, High.
Comparison between assessed risks & existing controls to identify :
1. High risk low control types 2. Low risk high control types 3. Less frequent high impact types 4. More frequent less impact types.
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RISK QUANTIFICATION
OPERATIONAL OPERATIONAL RISKRISKCREDIT RISKCREDIT RISK MARKET RISKMARKET RISK
STANDARDIZEDSTANDARDIZED
APPROACHAPPROACH
FOUNDATION –FOUNDATION –
IRB APPROACHIRB APPROACH
ADVANCED – ADVANCED –
IRB APPROACHIRB APPROACH
STANDARDISEDSTANDARDISED
APPROACHAPPROACH
INTERNALINTERNAL
MEASUREMENTMEASUREMENT
APPROACHAPPROACH
BASIC BASIC INDICATOR INDICATOR APPROACHAPPROACH
STANDARDIZED STANDARDIZED APPROACHAPPROACH
ADVANCED ADVANCED MEASUREMENT MEASUREMENT APPROACHAPPROACH
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Basic Indicator Approach
• Fixed percentage on Gross income shall be the Capital to be held by the Bank for Operational risk
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Standardized Approach• Bank’s activities are divided into:
1) Corporate Finance.2) Trading & Sales.3) Retail Banking.4) Commercial Banking.5) Payment & Settlement.6) Agency Services & Custody.7) Retail Brokerage.8) Asset Management.
• Capital charge to be calculated for each business line by multiplying gross income by a factor percentage assigned to it.
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Advanced Measurement Approach
• Gives discretion to the Bank to use their own internal loss data & assessment methods.
• Approach shall be used only after sufficient reliable data base of operational risk loss events is built up.
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• We have to measure operational risk We have to measure operational risk by Basic Indicator Approach in terms by Basic Indicator Approach in terms of RBI guidelines.of RBI guidelines.
• What is beneficial to Banks is AMA. What is beneficial to Banks is AMA.
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• THANK YOU
• T.V.RAO.FACULTY