Operational Risk Operational Risk Definition Risk of direct
- Slides: 13
Operational Risk
Operational Risk • Definition: – Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems. The failure may be due to external events also. – Excludes “Business Risk” and “Strategic Risk”.
Operational Risk Basel I defined operational risk as, • Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Basel II, defined operational risk as, • Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. • For emergence of such a risk four causes have been mentioned and they are • People, Process, Systems and External factors.
Components of Operational Risk • Transaction Processing Risk • Information Technology Security Risk • Legal Risk • Compliance Risk • Human Resources Risk
Components of Business Risk not Included in Operational Risk • Strategic Risk • Reputation Risk • Treasury Risk • Tax Risk
People Risk • Lack of key personnel, • Lack of adequate training/experience of dealer (measured in terms of opportunity cost/employee turnover), • Unauthorised access to the dealing room, • Tampering voice recorders, • Nexus between the front and back offices.
Process Risk Wrong reporting of important market developments to the • Management resulting in faulty decision making • Errors in entry of data in deal slips • Non-monitoring of exposure in positions • Loss of interest owing to the liquidity beyond prescribed limits
Process Risk Wrong reporting of important market developments to the management resulting in • Non-revision of rates in cases of volatility • Non-monitoring of closing and opening positions • Wrong funding of accounts (wrong currency) • Lack of policies in respect of new products
Systems Risk • Losses due to systems failure. • Not maintaining secrecy of system passwords. • Technology investment not made adequately. • Failure in systems development. • Lacuna in systems implementation. • Wrong judgment of system capacity.
External Risk • Legal and regulatory risk • Failure to enforce criminal proceedings • Outsourcing risk • Supplier risk • Infrastructure utilities failure • Treasury activities not complying with the regulatory requirement • Statutory obligation being not met • Political risk • Government risk
Operational Loss • Risk management focuses on large losses. • Historically large losses have been associated with credit risk and market risk. • Large losses also have a tendency to originate from business and operational failures. • Improving and stabilizing earnings for shareholders has to focus on controlling operational risk losses.
Operational Risk Loss Types 1. Legal Loss: customer, employee and other third party law suits. 2. Regulatory Compliance Loss: Fines for non disclosure, cost of license revocations and other costs. 3. Assets Loss: Reduction in value non-financial asset such as property.
Operational Risk Loss Types 4. Customer Compensarion: Compensation payments (principal and/or interest) or other compensatory payments to customers. 5. Fraud and Unauthorized Activities: Rogue trading, Unauthorized loan sanctions. 6. Process Loss: Late settlement, wrong counterparty deals.
- Liquidity measures
- Orm 5 steps
- Operational definition psychology example
- Operational risk management worksheet
- Sources of operational risk
- Wv board of risk and insurance management
- Operational risk scenario
- Operational risk management plan template
- Loss event category
- Technology and operational risk
- Operational risk management worksheet
- Benefits of operational risk management
- Orm training
- Direct material + direct labour