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Operational Risk in Financial Services

This document discusses operational risk management. It defines operational risk as losses resulting from failures in internal processes, people, and systems or from external events. It notes that strategic risk and reputation risk are not considered part of operational risk. The scope of operational risk is wide-ranging. Operational risks vary in frequency and impact, and change as an organization changes. Causes of operational risk include people, processes, technology, and external factors. Risk monitoring involves collecting operational risk data, monitoring the risk profile, and analyzing incident reporting data.

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19 views6 pages

Operational Risk in Financial Services

This document discusses operational risk management. It defines operational risk as losses resulting from failures in internal processes, people, and systems or from external events. It notes that strategic risk and reputation risk are not considered part of operational risk. The scope of operational risk is wide-ranging. Operational risks vary in frequency and impact, and change as an organization changes. Causes of operational risk include people, processes, technology, and external factors. Risk monitoring involves collecting operational risk data, monitoring the risk profile, and analyzing incident reporting data.

Uploaded by

Satvinder Singh
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Operational Risk Management

Himanshu Puri Assistant Professor (Finance) IILM CMS

Operational Risk

Loss resulting from inadequacies and failures in the internal processes, people and systems or from external events.

STRATEGIC RISK AND REPUTATION RISK ARE NOT CONSIDERED PART OF THIS OPERATIONAL RISK Strategic risk: arises from the adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes. Eg. Fixing the rate of interest wrt to credit ratings accepting lower credit ratings (sub-prime), Reputation Risk: due to negative public opinion. Eg bank demurs while paying the BG/ LC beneficiaries, Luke-warm attitude towards customers,

Scope of Operational risk is very wide.


3/8/2013

Comprehending Operational Risk


Operational risk exists almost everywhere in the organization Operational risks vary in their components. Some are high occurrence low value risks, while some are low occurrence and high value risk Operational risks in the organization continuously change especially when an organization is undergoing changes, like after merger.

Cause based Operational Risks


People oriented causes negligence, incompetence, insufficient training, integrity, ethical values, key person Process oriented (transaction based) causes business volume fluctuation, organizational complexity, product complexity and major changes. Process oriented (Operational control based) causes inadequate segregation of duties, lack of management supervision, inadequate procedures. Technology oriented causes poor technology and telecom, obsolete applications, lack of automation, information system complexity, poor design, development and testing External Causes natural disasters, operational failures of a third party, deteriorated social or political context.

The Third Consultative Paper recommended for event based classification


Internal fraud External fraud Employment practices and workplace safety Clients, products and business practices Damage to physical assets Business disruption and system failure Execution, delivery and process management

Risk Monitoring and Controlling


Collection of operational risk data (incident reporting framework circulating to all the branches and cautioning them) Regular monitoring and feedback mechanism in place for monitoring any deterioration in operational risk profile.. (balancing of books and internal audit systems) Collation of incident reporting data to assess frequency and probability of occurrence of operational risk events. Monitoring and control of management of large exposures.

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