This presentation discusses operational risk under Basel II and III. It provides an overview of the evolution of Basel guidelines and the focus of the Basel II framework on providing capital standards for banks to mitigate financial and operational risks. It defines operational risk and discusses the approaches to estimating capital - basic indicator, standardized, and advanced measurement. The presentation notes some pitfalls of Basel II and the focus of Basel III on increased capital requirements and liquidity standards. It addresses ongoing challenges in operational risk management and potential improvements.

1. OPERATIONAL RISK
UNDER BASEL II & III
Presentation by Eneni Oduwole
1

2. FBN CCPD, 2014 (ORGANIZED BY CIBN)
Outline
2

3. Evolution of Basel Guidelines
FBN CCPD, 2014 (ORGANIZED BY CIBN)
3

4. Focus of the Basel II Framework
• Provide a standard for bank regulators to ascertain capital required by banks
to guard against exposures to financial and operational risks thus promoting
safety and soundness
• Maintain reasonable regulatory consistency for internationally active banks
• Protect the international financial system from insolvency, collapse and
systemic risk by ensuring that risk taking is commensurate with the amount
of capital held by banks as safeguard for insolvency
FBN CCPD, 2014 (ORGANIZED BY CIBN)
4

5. FBN CCPD, 2014 (ORGANIZED BY CIBN)
Drivers of Basel II
5

6. Refresher: What is Operational Risk (OpRisk)?
• ‘the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events ’…Basel Definition
• It comprises 7 loss types, namely: Internal Fraud; External Fraud; Business
Practices; System Failures; Execution & Delivery; Damage to Physical Assets;
Employee Practices
• Losses are categorized as either Actual or Near-Misses (Potential and
Prevented)
FBN CCPD, 2014 (ORGANIZED BY CIBN)
6

7. FBN CCPD, 2014 (ORGANIZED BY CIBN)
OpRisk Under Basel II
• Conduct of Risk Control Self Assessments (Discussed)
• Monitoring of Key Risk Indicators (Discussed)
• Collation of Loss Data (Discussed)
• Maintenance of Risk Registers (Discussed)
• Estimation of Economic Capital
7

8. OpRisk Capital Estimation Under Basel II
• Estimation of Economic Capital using any of these approaches that is
suitable for the business model and maturity of the institution:
‒ Basic Indicator Approach (BIA)
‒ The Standardized Approach (TSA)
‒ Advanced Measurement Approach (AMA)
FBN CCPD, 2014 (ORGANIZED BY CIBN)
8

9. FBN CCPD, 2014 (ORGANIZED BY CIBN)
Pillar 1 for OpRisk
9

10. Measuring OpRisk Under Basel II
Business Line Internal
FBN CCPD, 2014 (ORGANIZED BY CIBN)
Environment
Objective
Setting
Event
Identification
Risk
Assessment
Risk
Response
Control
Activities
Info. &
Comms.
Monitoring Overall
Corporate Finance
Trading & Sales
Commercial Banking
Payment & Settlements
Agency Services
Asset Management
Retail Brokerage
Governance Issues
General OpRisk Mgt
Overall Rating
10

11. FBN CCPD, 2014 (ORGANIZED BY CIBN)
Pitfalls of Basel II
• Emphasis on regulatory compliance as against prudent business practices
• Reliance on data and risk measurement
• Focused mainly on Credit Risk Management
• Poor definition of risk tolerance levels and benchmarks for decision-making
• Incorrect risk aggregation stemming from weak risk correlations
11

12. FBN CCPD, 2014 (ORGANIZED BY CIBN)
Focus of Basel III
• Increased capital requirements by raising the quality, consistency and
transparency of an institution’s capital base
• Increased risk coverage for the trading book and complex transactions
• Introduction of leverage ratio as supplement for Basel II requirements
• Promoting stronger provisioning for future business activities
• Introduce liquidity coverage ratio and net stable funding ratio that would
assure higher probabilities of solvency
12

13. FBN CCPD, 2014 (ORGANIZED BY CIBN)
OpRisk Challenge
13

14. Way Forward for Effective OpRisk Mgt
FBN CCPD, 2014 (ORGANIZED BY CIBN)
14

15. Thank You…
Eneni Oduwole
eneni.oduwole@dangote.com
Tel: 234-8033045896