This presentation discusses operational risk management in the banking sector. It covers topics such as categories of operational risk, risk identification and analysis techniques, key risk indicators, and risk mitigation strategies. The presentation is delivered by five students and contains several sections that outline the flow of topics to be presented.
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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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… The Operational Risk management (ORM) in Banking Sector …
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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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*** Risk Management Indicators ***
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.
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*** Risk Management ***
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.
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*** Risk Management ***
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*** Risk Mitigation Management ***
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.
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*** Risk Mitigation Management ***
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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*** Risk Mitigation Management ***
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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