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Operational Risk Management. Member Education Series Seminar Indian Institute of Banking & Finance Nagpur November 2005. Agenda. Definition Causes/Contributors Process Gross Income Computation of Capital Charge Approaches Assessing events Measurement basis Monitoring

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operational risk management

Operational Risk Management

Member Education Series Seminar

Indian Institute of Banking & Finance


November 2005

  • Definition
  • Causes/Contributors
  • Process
  • Gross Income
  • Computation of Capital Charge
  • Approaches
  • Assessing events
  • Measurement basis
  • Monitoring
  • Data requirements
  • Management tasks

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
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 oprisk1
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
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
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
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
Computation of Capital Charge


Capital change based on

single risk indicator


Capital based on business

lines and industry standards




Capital based on business

lines and internally

calculated standards

standardized approach capital charge








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
recognizing assessing risk events
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


  • Self assessment
  • Risk mapping
  • Key Risk indicators
factors assessing potential risk areas
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
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
Monitoring Operational Risk--Issues

Operational loss events

Identification of appropriate indicators

Frequency of monitoring and reporting


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 Types




Risk management


Data Collected

Loss Event Data

Causal Data

Loss Effect

Key Risk Indicators (KRIs)


Risk Inventories

Structured Self Assessment Data

External Data

OpRisk Management & Data Needs
management tasks
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
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