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Operational risk (by ms.sweta vijuraj)

  1. OPERATIONAL RISK MANAGEMENT Presented by Sweta Vijuraj
  2. Take away… What is Risk Management?  What are the types of Risk? What is Operational Risk? Why Operational Risk Mgt ? How to identify & monitor Operational Risk? How to measure Operational Risk? How to mitigate and control Operational Risk?
  3. RISK MANAGEMENT  Risk – probability of a loss or of a danger. The concept of risk combines the probability of an event occurring with the impact that event may have & its various circumstances of happening.  Risk Management (RM) is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.  RM is thus a tool to create business value through an integrated process of identification, estimation, assessment, and controlling risks.  Defined as the complete set of policies and procedures which organizations have in place to manage monitor and control their exposure to risk
  4. RISK MANAGEMENT  Its main objectives are to protect the institution from unacceptable losses, to make optimal use of capital  It has assumed lot of importance in present scenario when there is heightened awareness of risk.  More than a regulatory reporting exercise.  Should not be viewed as a defensive activity.  Requires Senior Management’s involvement.
  5. Types of Risks  Credit Risk - Default risk, Concentration risk, Country risk  Market Risk – Interest rate risk, Currency risk, Equity risk, Commodity risk  Operational Risk - Legal risk, Model risk  Liquidity Risk – Asset liquidity, Funding liquidity  Strategic Risk  Reputational Risk  Systemic Risk
  6. Basel I  The first Basel Accord, known as Basel I, was issued in 1988 and focuses on the capital adequacy of financial institutions.  Originally developed to cover credit risk capital requirements.  Assets sorted into four categories based on risk exposures.  8% capital requirement.  Amended in 1996 to include market risk capital requirements.
  7. Basel-II  Basel II - Introduced in 2004, as Introduction Basel I - the existing framework introduced in 1988 - • Basel I felt to be inadequate for evaluating the felt to be inadequate for evaluating the risks in the evolving financial system risks which was in becoming the evolving more complex, financial innovative and system diversified. which was becoming Hence Basel II was developed more as the complex, answer to this requirement. innovative and diversified. • Hence Basel II was developed as the answer to this requirement. Basel II addressed not only credit & market risk capital but also operational risk capital.
  8. Basel II – the Three Pillars Basel II PILLAR 1 PILLAR 2 PILLAR 2 Pillar I Minimum Capital Requirement Pillar III Market Discipline (Disclosure) Pillar II Supervisory Review Process Rules To Calculate Required Capital Increased Supervisory Power Increased Disclosure Requirements
  9. What is Operational ?
  10. Just think of the following scenarios –  What if your signature was forged on your stolen cheque and amount was fraudulently withdrawn from your account,  Suddenly the bank’s branches close for a few days on account of floods,  The system server is down during the peak working hours,  Your fund transfer was successfully done but transferred to the wrong account,  Busy operations in dealing rooms of major banks come to a halt?
  11. Global OR Events (External) Catastrophic losses on account of OR Events (External): i)9/11 - Terrorist attack on WTC (2001) ii)26/07 – Mumbai Floods (2005) iii)26/11 – Mumbai Terror Attacks (2008) iv)11/03 – Japan – Earthquake, Tsunami (2011) and Nuclear Crisis
  12. Global OR Events (Financial losses) Financial Losses due to OR Events : ii)1999 – Ketan Parekh Scam –Illegal borrowings from GTB & others by pledging shares as collaterals (GTB collapse) iii)2008 – Societe Generale – 2nd largest Bank in France lost € 4.9 bn by the fraudulent future trader iv)2009 – Satyam Scam – Fudging of accounts by its founder – Biggest Corp Fraud of Rs.8000 crores v)2010 – Citibank Fraud –Mutli-crore (Rs.400 cr) fraud by RM – luring HNIs to invest in bogus Invst schemes –36% vi) 2013 - Cybercrime syndicate committed fraud through compromised POS terminal across Europe. 36000card holders in 16 countries affected vii) 2013- USD 45 million prepaid card fraud. (2 Middle East banks affected) viii) 2014 – INR 250 crores scam in public sector Bank in India wherein the branch manager and a private person allegedly took loan using forged documents on behalf of seven private companies which had deposits in the bank.
  13. Example Barrings Bank – The incident involved loss of roughly $1.25 bn due to unauthorized trading activities during 1993 to 1995 of a single, relatively junior trader named Nick Leeson. Leeson, who was supposed to be running a low-risk limited return arbitrage business for Barrings in Singapore, was actually taking increasingly large speculative positions in Japanese stocks & interest rate futures and options. He was taking positions on behalf of fictitious customers, booking losses to non-existent customer accounts. Losses happened because of movement of market variables not in favour of Leeson’s positions. – Market risk vs Ops risk?
  14. Ops risk losses often contingent on market movements. This particular case is classified under Operational Risk because it involved –  Fraud - Unauthorized trading (Internal fraud), forging signature, non disclosure, criminal breach of trust etc. &  The Failure of Internal Controls • No clearly laid down reporting lines • Several managers responsible for monitoring Leeson’s performance did not do their job (Not questioning the unexpected sources of profit ) • No segregation of front and back office activities • No comprehensive review of Leeson’s funding requirements
  15. How Operational Risks is defined? Basel II has defined Operational Risk as - “ the risk of loss resulting from inadequate or failed - internal processes, - people and - systems or - from external events”. Basel II has clarified that OR includes legal risk but specifically excludes strategic & reputational risks.
  16. OR Management – Why? Why Operational Risk Management (ORM)?
  17. ORM – Why?  It has been believed that banks are exposed to two main risks - Credit risk and Market risk  Serious changes in the global financial markets in the last 20 years have caused noticeable shifts in banks’ risk profile – globalization and deregulation, technological innovation and advances in the information network, and an increase in the scope of financial services and products – complex network. OR occur in the banking industry every day. Most of the losses are small in magnitude (frequent/predictable/ preventable) and some are severe in magnitude of loss.  Loss due to OR events are far reaching and catastrophic
  18. OR - Significant in Recent Years Economy is fragile Loss due to OR events are far reaching and catastrophic Historic OR events exhibit that they are totally distinct from one another – either globally or in our Bank  History proves whoever puts in place BCP/Risk Mitigants manage OR events better than others Banks need to move towards advanced approaches for calculation of OR capital Advanced approaches involve statistical method of calculation of capital
  19. ORM The term Operational Risk Management (ORM) is defined as a continual cyclic process which includes risk assessment, risk decision making, and implementation of risk controls, which results in acceptance, mitigation, or avoidance of risk.
  20. How to identify & monitor Operational Risk?
  21. ORM Tools  Loss Data Collection Exercise and Analysis  Conduct of RCSA (Risk and Control Self-Assessment) exercise.  Tracking of KRIs (Key Risk Indicators) at Branch level and Bank level.  Scenario Analysis
  22. What is loss data? Loss Data consist of Losses arising due to inadequate or failed Internal Process People Systems External events
  23. Examples of loss data
  24. Collection of loss data  Historical loss experience provides meaningful information for assessing bank’s exposure to OR  The Bank undertakes the Loss Data Collection exercise on a half yearly basis and has loss event data base since 1st April 2008  Analysis of Loss data is undertaken by RMD on a half-yearly basis and the findings along with mitigation measures are submitted to CORM/R.Com  LDRT (Loss Data Reporting Template) introduced since 01.01.2012 for Reporting/Accounting of OR Loss incidents  Tracking OR loss incidents on real-time basis through SAS OR Monitor (EGRC)
  25. Mapping Of Loss Data As Per Basel Business Lines Loss event type classification EL1 EL2 EL3 EL4 EL5 EL6 EL7 BUSINESS LINES Internal Fraud External Fraud Employment practices & workplace safety Clients, Product s & Buz Prac Damage to physical assests due to natural disaster Business disruption & System failures EDPM Corp Fin BL1 T & S BL2 Retail Bkg BL3 Comm. Bkg BL4 P & S BL5 Agency Serv BL6 Asset Mgt BL7 Retail Brkge BL8
  26. Measuring OR - Findings Major Frauds, Natural Disasters (such as Fire, flood, Earthquake), Terrorist attack etc. High Impact Minor accounting errors, leakage of income, routine mistakes (available from internal audit) Low Impact Low Frequency High Frequency
  27. Risk and Control Self Assessment (RCSA) RCSA is a risk management program where risks and controls are examined and assessed to provide reasonable assurance to management that business objectives will be met. Steps: 1. self assessment exercise - list out all activities that are susceptible to OR - List out the main business lines, products/processes in each of these business lines, then list out the risks associated with each of these products/processes (combination of experience, judgement, intuition and past losses) 2. Evaluate: Risk (in terms of frequency and severity) and arrive at Inherent Risk 3. Evaluate: Controls (in terms of Control Design Effectiveness & Control Operating Effectiveness) and arrive at Residual Risk.
  28. Key Risk Indicators (KRIs) RCSA exercise helps in identification and design of appropriate Key Risk Indicators (KRIs). (KRIs) are early warning signals, which enable management to monitor and mitigate operational risks that are reaching beyond acceptable levels. Example of KRIs would be –For branches; number of days, day end cash did not tally, number of days cash retention limit was breached, number of days ATM cash tally did not happen.  They also provide a backward looking view on risk events, so lesson can be learned by the past.  They are one of the Basel recommendations for Sound Operational Risk Management.
  29. Tracking of KRIs - How it is done ?  Bank level KRIs : Presently 15 KRIs covering Treasury, IT and HR tracked quarterly by the respective departments.  Branch level KRIs : Presently 25 KRIs covering domestic branches tracked quarterly by Concurrent Auditors and ZO Risk Management Cell Officials. 20 KRIs covering foreign branches. The Branch level KRIs helps in identifying High/ Medium/Low Risk Rating branches.  The KRIs are tracked and reported to Operational Risk Management Cell in RMD who in turn analyze the results and report to the Senior Management.  Zones are also advised to conduct workshops to sensitize high risk branches in order to strengthen internal control measures in these branches.
  30. How to measure Operational Risk?
  31. Measuring Operational Risk  Operational Risk is comparatively difficult to quantify.  However, as Operational Risk impact is positively correlated with income size and dispersion of business units – capital charge for OR is calculated as %age of Gross Income
  32. Calculation of Capital Charge on OR Basel Committee on Banking Supervision [BCBS] has put forward three methods for calculating operational risk capital charge: Three approaches – Basic Indicator Approach (BIA) The Standardised Approach (TSA) Advanced Measurement Approaches (AMA)
  33. Three Approaches for ORCC Basic Indicator Approach (BIA) Average of Gross income for three years as indicator. Capital charge equals 15% of the indicator. The Standardized Approach (TSA) Gross income per regulatory line as indicator. Depending on business line 12, 15 or 18% of the indicator as capital charge. Total capital charge equals sum of charge per business line. Advanced Measurement Approach (AMA)  capital charge equals internally generated measures based on Internal loss data, External loss data, Scenario analysis and BECIFs . Recognition of risk mitigation - insurance – upto 20%
  34. Capital Charge computation under TSA • Gross Income = Interest Income + Non Interest Income (-) Interest expense
  35. Usage of GI as proxy indicators  BIA and TSA – simpler approaches - but charge more capital.  Risk indicator based on income level (Gross Income) and not on risk exposures.  BIA- one size fits all, doesn’t consider risks separately for different activities.  TSA: Ambiguity in BL descriptions – activity allocations to Business Lines (BL) with lower Beta.  Negative Gross Income allowed to be off set against positive.
  36. Inputs for AMA Under AMA, banks are required to incorporate four key data inputs/elements in capital modeling: 1) Internal loss data 2) External loss data 3) Scenario analysis data 4) Business environment and internal control factors (BEICF) (BE factors: Employee attrition, Growth factor, Product complexity. IC factors: RCSA scores, Key risk indicators, Internal audit ratings and Operational risk appetite. Estimated capital is scaled up/ down based on BE factors & IC factors).
  38. Modeling Approach in AMA Being an evolving area, regulators have given flexibility of selecting modeling methodology to the banks.  Some of the Approaches used:  Loss Distribution Approach (LDA)  Scenario Based Approach (SBA)  Hybrid Approach
  39. OpVaR model (illustrative) Source data Modeling Simulations Aggregation Internal Loss Data External loss data Scenario Analysis BEICF adjustments Distribution Fitting Distribution Fitting Frequency & Impact – Output: Simulated Internal losses Simulation – Output: Combined Loss value Frequency – Output: Simulated Scenarios losses Bank level OpVaR Component VaR (business line wise) Adjusted Component VaR
  40. OR Capital Adequacy-Economic Capital Eg: If the bank has a Maximum loss (Op Var) of 100 & Expected loss (mean) of 20, then , Economic Capital = 100 – 20 = 80
  42. AMA: Key challenges  Non-availability of historical data in majority of cells and dependence on scenarios in the absence of India specific external loss data.  Incorporation of correlation among scenarios.  Incorporation and identification of BEICF elements in the capital computation/allocation.  Back-testing of OpVaR computation.
  43. How to mitigate and control Operational Risk?
  44. Mitigating Operational Risk  Damages due to natural disasters, fire, etc – INSURANCE  Losses from Disruptions – electricity / telecommunication – BACKUP  Losses due to internal reasons - STRONG INTERNAL AUDIT PROCEDURE  OR Events leading to severe business disruption – Business Continuity Plans (BCPs) [Mitigants put in place to be reviewed periodically to ensure contingency strategies remain consistent with current operations, risk & threats, resiliency requirement and to facilitate BC with minimum loss of time.]
  45. Bank Of India – Journey of Corporate Office 1906 1950 1973 2003
  46. Risk Management Architecture in BOI Risk Management Architecture
  47. Operational Risk BOI
  48. OR - Organizational setup [ORMF]  Board of Directors  Risk Management Committee of the Board (R.Com)  Committee for Operational Risk Management (CORM)  Operational Risk Management Department (ORMD)  Business Operational Risk Managers (BORM)  Support Group - Operational Risk Management Specialist (ORMS)  RMD set-up at ZOs/LCBs/DOs/Foreign Centres  Business Line OR Management (Branch Level)
  49. BOI Progress in ORM I – Comprehensive ORM Policy The Operational Risk Management policy has been framed considering various regulatory guidelines issued from time to time. This policy document describes the approach to Operational Risk Management within the Bank as part of Enterprise-wide Risk Management and also to comply with the regulatory guidelines.  ORM Policy covers- Scope & Applicability Operational Risk Management Framework – Governance structure, three lines of defence, roles and responsibilities Operational Risk Management Process Capital Measurement Independent Evaluation Sound Industry Practice
  50. BOI Progress in ORM II – Business Line Mapping  Mapping of products to business lines through Risk Registers Bank`s total products(aggregating more than 100 in Deposits, Advances, Remittances & Miscellaneous Services have been mapped to Business Lines as per Basel II norms  Mapping of income & expenses for capital charge computation under TSA – automated using SAS
  51. BOI Progress in ORM III - RCSA Risk & Control Self Assessment (RCSA)  11 Risk Registers covering all the products and processes in all the Business Units and Support functions have been prepared to aid in Risk and Control Self Assessment (RCSA) exercise.  RCSA exercise done online using SAS system.  Sample Retail Banking Assets Risk register
  52. BOI Progress in ORM IV - KRIs Key Risk Indicators (KRIs)  Key Risk Indicators (KRIs) are revised based on the RCSA results and in all there are 60 KRIs (15 Bank level, 25 Domestic branch level and 20 Foreign branch level).  Revised KRIs are tracked and analyzed and reported to Senior Management on a quarterly basis. KRI examples
  53. BOI Progress in ORM V – Loss data collection Loss Data Collection  Loss data reported using “Loss Data Reporting Template (LDRT)” Reporting process will be automated with help of SAS from January 2014.  Loss accounted using Finacle P&L Heads: PLOE061 (frauds) & PLIP034 (non-frauds)  Loss data collection since 2008. We have six years loss database.
  54. BOI Progress in ORM VI – Analysis of high value loss events Analysis of high value loss events  Fraud analysis is undertaken on a periodical basis by Fraud Risk Management Department.  Operational Risk Management Cell analyses loss events above Rs.50 lakhs in terms of failure of controls, systems, process and people and suggests mitigation measures to control/prevent such loss events. This analysis is then reported to the Senior Management .
  55. BOI Progress in ORM VII – BCP & DRM Business Continuity Plan Disaster Recovery management  Bank's Data Center is located at CBD Belapur and DR site in Bangalore which are in different seismic zones.  Data at both the sites is always in mirrored status which ensures uninterrupted services to customers.  Bank has Global Processing Center at Singapore for all overseas centers which ensures centralized monitoring of transactions
  56. BOI Progress in ORM VIII - Audit Risked Based Internal Audit Bank has migrated to Risked Based Internal Audit from 01/04/2007 and the assessment is being done based on exposure of the branches to various types of risks like Operational Risks, Credit Risks, Compliance Risks, Earning Risks. Technology Risks etc. Suitable mitigating measures are initiated immediately on the receipt of requisite report.
  57. BOI Progress in ORM IX – IT Risks IT Risks & Cyber Crime prevention  Bank has put in place comprehensive Information System Security Policy.  Bank has appointed Chief Information System Security Officer dealing exclusively with the system security and risks related to IT and cyber crimes.  Bank has introduced Information Security Portal on Bank's website which alerts all concerned about the IT Risk threats on an ongoing basis.
  58. BOI Progress in ORM X New Product Group Any new product/process is first passed through a Sub-Group called “Product Group” before submission to Committee on Operational Risk Management (CORM) for clearance and to ED/CMD/Board for approval. Risk Assessment Questionnaire for New Product/Process
  59. BOI Progress in ORM XI KYC & AML Policies  Bank has put in place elaborate KYC & AML policies  KYC is being done for deposit & credit customers as well as those effecting remittances from the Bank  The Bank has also purchased AML software
  60. BOI Progress in ORM XII Employee Fraud Prevention Maker Checker concepts & Dual Control Adequate Remuneration & compensation to staff commensurate with performance Various Staff incentive schemes Appropriate Training & Guidelines Documented Service conditions & Service Regulations
  61. BOI Progress in ORM XIII Unauthorized Activity Control  Laid down procedures & guidelines  Delegated Powers for credit & Non credit matters  System of Noting & Reporting of sanctions to next higher authority
  62. BOI Progress in ORM XIV Employee Practice & Work Place Safety  Documented HR Policy for appointment, transfer, promotion, placement and overseas posting  Adherence to all local labour & industrial laws  Proper Succession Planning  Redressal of staff grievances through welfare committees  Direct communications to staff by Top Management
  63. BOI Progress in ORM XV Outsourcing Risk Management  Laid down procedures for selection of panel of vendors  Fool Proof agreement documents  Periodic Review of outsourcing arrangements  Customer/Shareholder complaint redressal mechanism
  64. BOI Progress in ORM XVI Security Measures:-  Effective security measures put in place to safeguard banking assets  Security Guards, CCTVs, Burglar Alarms, Smoke Detectors, Fire Proof vaults and cabinets for documents storage, insurance etc.
  65. BOI Progress in ORM XVII Ops Risks embedded in other risks :-  Cash Management – Cash retention limit, Cash van management including transit insurance, Counterfeit notes  Credit Mgt-Timely review & inspections, Vetting of documents by advocates, Up to date maintenance of mortgage register  Treasury Mgt – Front & Back office control, Exposure limits, Stop Loss limits  Investment Mgt – ALCO committee for fresh investments/review of existing investments.  Marketing –Deployment of trained staff with full product knowledge
  66. To Summarize…  Operational Risk if the most important of all risks as it involves managing the unknown! Most difficult to quantify & manage!  ORM framework must be closely integrated into the day-to-day risk management processes of the bank.  Use ORM tools (loss data, RCSA, KRI) to gather information and perform analysis to report findings to Senior Management for business decision making.  ORM to identify those risks which needs to be taken and those which needs to be insured.  Spreading Risk culture in the Organization is important for successful implementation of Operational Risk Management Framework in the Organization.
  67. My Contact Number :- Direct :BOI -HO RMD 022 66684974 E mail :

Hinweis der Redaktion

  1. Pillar I : Established different approaches for capital charge computation: Cr risk : Standardised, FIRB & AIRB; Ops Risk:BIA,TSA & AMA; Mkt risk: Standardised approach & IMA