operation risk management in banking sector

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… The Operational Risk management (ORM) in Banking Sector

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Presentation By:

Joseph Philip : Roll No 001

Rachita Patel : Roll No 067

Athira Nair : Roll No 079

Sanjay Kumbhar : Roll No 107

Vinod Bopche : Roll No 109

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*** Flow of Presentation ***

Introduction & Overview

Categories of OR

Measure & Evaluation of OR

Risk Identification & Analysis

Risk Management

ORM Indicators-KPI, KCI & KRI

ORM- Market Risk, Credit Risk & Operational Risk

Risk Mitigation Techniques

Conclusion

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*** Flow of Presentation ***

Introduction and Overview :

Risk is uncertainty about a future outcome. It is highly multifaceted, complex and often interlinked. Risk is part of corporate life & essence of financial institutions' activities. Risk is Risk can not be avoided & hence it is to be managed, not feared.

Financial services - dealing with so many daily actions and reactions by human beings - are exposed to a variety of risks.

Recognized risk & Unidentified risk.

Operational risk- Loss resulting from..

a) Inadequate or failed internal processes

b) People

c) External events

Key Parameters/Factors affects ORM :

New products

New distbn channels

New markets

New technology

New legislation

New Competitors

Product sophistication

E-Commerce

Processing speed

Business volume

Role of non-Govt.

Globalisation

Stakeholder pressure

Regulatory pressure

Mergers and Acquisitions

Cultural Diversity

Insurance Companies

Capital Markets

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*** Introduction ***

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*** Reputation, Strategy & Operational Risk ***

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1. Organisation Risks:

Change management

2. Policy and Process Risks:

Processes gaps

3. Technology Risks:

Defective hardware- or software

4. Human Risks:

Failure of employees, employer responsibilities

5. External Risks:

Fraud or litigation

*** Top 5 Categories of ORM ***

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*** Measure & Evaluation Technique of OR ***

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*** Risk Analysis Process ***

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*** Risk Management Framework ***

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*** Risk Management Process ***

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Key Performance Indicators (KPI):

KPI are normally used for monitoring operational efficiency; red

flags are triggered if the indicators move outside the established

range.

Examples: failed trades, staff turnover, volume, systems downtime.

Key Control Indicators (KCI):

KCI demonstrate the effectiveness of controls.

Examples: number of audit exceptions, number of outstanding

confirmations.

Key Risk Indicators (KRI):

KRI are primarily a selection of KPIs and KCIs. This selection is

made by risk managers from a pool of business data/indicators

considered useful for the purpose of risk tracking.

*** Risk Management Indicators ***

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MARKET RISK MANAGEMENT:

We may believe that there are limited tools available to mitigate this risk,

but this is not so. Future, option, derivatives trading and its many sub types

are some of the tools which help to investors to protect the investment or

minimize there exposure toward market risk. In case of derivatives as in

broader sense derivatives are considered to be used to hedge against market

risk, but they can be used to mitigate various other types of risks, like credit

risk, operational risk.

CREDIT RISK MANAGEMENT:

Tools of Credit Risk Management: The instruments and tools, through which

credit risk is managed are: Exposure Ceilings, Review/Renewal, Risk Rating

Model, Risk based scientific pricing, Portfolio Management, Loan Review

Mechanism

OPERATIONAL RISK MANAGEMENT:

This risk can be reduced to great extent by effectively controlling

organization as a whole by taking certain steps, like assuring that designed

processes is carried out carefully & with the help of experts, and are followed

in desired way.

*** Risk Management ***

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*** Risk Management ***

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Principle 1: The board of directors should take the lead in establishing a strong risk management culture. The board & senior management should establish a corporate culture- guided by strong risk management and that supports and provides appropriate standards and incentives for professional and responsible behaviour. on.

Principle 2: Banks should develop, implement and maintain a framework that is fully integrated into the bank’s overall risk management processes. The Framework for operational risk management chosen by an individual bank will depend on a range of factors, including its nature, size, complexity and risk profile.

Principle 3: Governance:The board of directors should establish, approve and periodically review the Framework. The board of directors should oversee senior management to ensure that the policies, processes and systems are implemented effectively at all decision levels.

Principle 4: The board of directors should approve and review a risk appetite and tolerance statement for operational risk that articulates the nature, types and levels of operational risk that the bank is willing to assume.

*** Risk Mitigation Management ***

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Principle 5: Senior Management:Senior management should develop for approval by the board of directors a clear, effective and robust governance structure with well defined, transparent and consistent lines of responsibility. Senior management is responsible for consistently implementing and maintaining throughout the organisation policies, processes and systems for managing operational risk in all of the bank’s material products, activities, processes and systems consistent with the risk appetite and tolerance.

Principle 6: Identification and Assessment: Senior management should ensure the identification and assessment of the operational risk inherent in all material products, activities, processes and systems to make sure the inherent risks and incentives are well understood.

Principle 7: Senior management should ensure that there is an approval process for all new products, activities, processes and systems that fully assesses operational risk.


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Principle 8: Monitoring and Reporting:Senior management should implement a process to regularly monitor operational risk profiles and material exposures to losses. Appropriate reporting mechanisms should be in place at the board, senior management, and reporting mechanisms should be in place at the board, senior management, and

Principle 9: Control and Mitigation:Banks should have a strong control environment that utilises policies, processes and systems; appropriate internal controls; and appropriate risk mitigation and/or transfer strategies.

Principle 10: Business Resiliency and Continuity: Banks should have business resiliency and continuity plans in place to ensure an ability to operate on an ongoing basis and limit losses in the event of severe business disruption.

Principle 11: Role of Disclosure: A bank’s public disclosures should allow stakeholders to assess its approach to operational risk management.

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*** The Way Forward ***

Let’s make a difference: Managing compliance and operational risk in the new environment

Banks are facing expanding compliance expectations that are pushing compliance programs to the brink. The scope and nature of compliance have evolved and are no longer limited to rules-based banking regulations. Operational and compliance risks have become more complex and entwined, increasing the potential for failed processes that cause customer confusion and compliance control breakdowns. Without a new approach to compliance and operational risk management, many banks will continue to face high costs and losses in the form of escalating litigation, penalties, and staffing needs.Given the major changes in the compliance and regulatory landscape and the resulting long-term impact on banks, incremental adjustments will simply not be enough. To start, we recommend that banks take a look at six innovative approaches to drive change:•Integrate relevant aspects of operational and compliance risk management•Simplify products and channels•Leverage analytics•Standardize compliance testing•Adopt lean principles•Manage change

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operation risk management in banking sector

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