Operational risk can result in losses from failed internal processes, people, or systems or from external events. It is inherent in all business activities. There are four main approaches under Basel II to calculate capital requirements for operational risk: Basic Indicator Approach, Standardized Approach, Advanced Measurement Approaches (AMA), and the Internal Ratings-Based Approach (IRB). The Standardized Approach divides activities into business lines and assigns risk factors to each to determine capital charges. The AMA uses a bank's internal risk measurement system to determine regulatory capital requirements subject to supervisory approval.
Operational Risk Management under BASEL eraTreat Risk
Operational risk have always ignored by Banks as they thought Credit and market risks can cause catastrophe. But history of misfortunes taught us different lessons. Controls and internal audit have long been construed as guard till BASEL II dictates forced banks to look with insight. Understand the dimension of ORM in this presentation.
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This presentation provides insights on how the proper implementation of Operational Risk Management can lead to effective risk profiling, analysis and mitigation. It introduces operational risk as a bedrock for meaningful risk management irrespective of which industry an organization plays in.
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a short description in mixed English and Bahasa Indonesia on Operational Risk Management and Measurement, in particular value at risk calculation using Monte carlo Simulation. Another method using EVT (Extree Value Theory) will be delivered shortly. regards
Operational Risk Management under BASEL eraTreat Risk
Operational risk have always ignored by Banks as they thought Credit and market risks can cause catastrophe. But history of misfortunes taught us different lessons. Controls and internal audit have long been construed as guard till BASEL II dictates forced banks to look with insight. Understand the dimension of ORM in this presentation.
Operational Risk Management - Understanding Your Risk LandscapeEneni Oduwole
This presentation provides insights on how the proper implementation of Operational Risk Management can lead to effective risk profiling, analysis and mitigation. It introduces operational risk as a bedrock for meaningful risk management irrespective of which industry an organization plays in.
Operational risk management and measurementRahmat Mulyana
a short description in mixed English and Bahasa Indonesia on Operational Risk Management and Measurement, in particular value at risk calculation using Monte carlo Simulation. Another method using EVT (Extree Value Theory) will be delivered shortly. regards
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In this introductory presentation on the subject, salient features that changed in approaches adopted for Operational Risk Management under Basel I and Basel I were highlighted.
The Risk and Control Self Assessment (RCSA) is an integral part of most operational risk management frameworks. RCSAs provide a structured mechanism for estimating operational
exposures and the effectiveness of controls. In so doing RCSAs help organisations to prioritise risk exposures, identify control weaknesses and gaps, and monitor the actions taken to address any weaknesses or gaps.
A well designed and implemented RCSA can help to embed operational risk management across an organisation, improving management attitudes towards operational risk management and enhancing the overall risk culture. In contrast, an inefficient or unnecessarily complex RCSA can damage the reputation of the (operational) risk function and reinforce the perception that
operational risk management is a bureaucratic, compliance-focused, exercise that does not support the achievement of organisational objectives.
Learn more about Risk Management and the essentials with IRM’s level 1 certification.
https://www.theirmindia.org/level1
Level 1 qualified or risk management professionals with 2-3 years of experience can also enroll for level 2 certification.
https://www.theirmindia.org/level2
Visit: https://www.theirmindia.org/
Address: IRM India Affiliate, 907,908,909, Corporate Park II, 9th Floor, VN Puran Marg, Near Swastik Chambers, Chembur Mumbai 400071
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
MODULE 4:
Market Risk (includes asset liability management)
Yield Curve Risk Factor-Domestic and global contexts-handling multiple risk factor-principal component analysis- value at Risk (VAR) – implementation of a VAR system- Additional Risk in fixed income markets-Stress testing- Bank testing.
This presentations tells the story of the Risk-led transformation that HML has undertaken over the last 18 months. It outlines some of the key challenges, how they were overcome and the benefits delivered.
Operational Risk Management Under Basel II & Basel IIIEneni Oduwole
In this introductory presentation on the subject, salient features that changed in approaches adopted for Operational Risk Management under Basel I and Basel I were highlighted.
The Risk and Control Self Assessment (RCSA) is an integral part of most operational risk management frameworks. RCSAs provide a structured mechanism for estimating operational
exposures and the effectiveness of controls. In so doing RCSAs help organisations to prioritise risk exposures, identify control weaknesses and gaps, and monitor the actions taken to address any weaknesses or gaps.
A well designed and implemented RCSA can help to embed operational risk management across an organisation, improving management attitudes towards operational risk management and enhancing the overall risk culture. In contrast, an inefficient or unnecessarily complex RCSA can damage the reputation of the (operational) risk function and reinforce the perception that
operational risk management is a bureaucratic, compliance-focused, exercise that does not support the achievement of organisational objectives.
Learn more about Risk Management and the essentials with IRM’s level 1 certification.
https://www.theirmindia.org/level1
Level 1 qualified or risk management professionals with 2-3 years of experience can also enroll for level 2 certification.
https://www.theirmindia.org/level2
Visit: https://www.theirmindia.org/
Address: IRM India Affiliate, 907,908,909, Corporate Park II, 9th Floor, VN Puran Marg, Near Swastik Chambers, Chembur Mumbai 400071
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
MODULE 4:
Market Risk (includes asset liability management)
Yield Curve Risk Factor-Domestic and global contexts-handling multiple risk factor-principal component analysis- value at Risk (VAR) – implementation of a VAR system- Additional Risk in fixed income markets-Stress testing- Bank testing.
This presentations tells the story of the Risk-led transformation that HML has undertaken over the last 18 months. It outlines some of the key challenges, how they were overcome and the benefits delivered.
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[Note: This is a partial preview. To download this presentation, visit:
https://www.oeconsulting.com.sg/training-presentations]
Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
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It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
2. What is Operational Risk?
The risk of loss resulting from inadequate or failed
internal processes, people and systems or from
external events (The Basel II Capital Accord)
FORMERLY any risk but market and credit risks
It is NOT a brand new stuff and it is the risk that affects
all businesses
Operational risk is inherent in carrying out a process/
operational activity.
11/16/12 2
3. Classification of Operational Risks
High High Operational risk events are
Frequency Frequency classified by two factors:
Low High frequency – how often the
Frequency
Impact Impact event occurs
impact – the amount of the
Low Low
Frequency Frequency losses resulting from the
event
Low High
Impact Impact
Impact
11/16/12 3
4. Classification of Operational Risks
Generally, operational risk management focuses on only
two of these event types:
Low frequency / high impact (LFHI)
High frequency / low impact (HFLI)
Why?
11/16/12 4
5. Classification of Operational Risks
High frequency/low impact events are managed to
improve business efficiency. These events tend to be
readily understood and are viewed as ‘the cost of doing
business’.
Examples?
11/16/12 5
6. Expected loss verses unexpected loss
Expected loss is the loss incurred as a bank conducts its
normal business.
Can be simply defined as the cost of doing business
The only way to totally prevent them is to cease doing
business.
11/16/12 6
7. Expected loss versus unexpected loss
A bank uses statistical methods to predict its expected
losses.
In short, the firm uses past data and experience to
predict the future.
A simple method of calculating expected loss is to
compute the mean (average) of the actual losses over a
given time and accept this as the likely future level.
11/16/12 7
8. Expected loss verses unexpected loss
A firm may also attempt to ‘predict’ its unexpected losses
using statistics, much like the way that is used to predict
expected losses.
The problems are the past data may not available and
therefore to calculate unexpected loss a firm uses:
available internal data
external data from other firms
data from operational risk scenarios
11/16/12 8
9. Operational risk event categories
The simplest way of understanding operational risk in banks is to
categorize it as anything but credit risk or market risk.
However, this is a very broad definition and does not help manage
operational risk.
Generally, operational risk events can be subdivided into:
internal process risk
people risk
systems risk
external risk
legal risk
11/16/12 9
10. Internal Process Risk
Internal process risk is defined as the risk associated
with the failure of a bank’s processes or procedures.
During a bank’s day-to-day operations, staff follow preset
working practices.
These procedures and policies will include all the
checks, and controls required to ensure that customers
are correctly served and the bank remains within the
laws and regulations by which it is governed
11/16/12 10
11. Internal Process Risks
Internal process risk events include:
documentation – inadequate, insufficient or wrong
lack of controls
marketing errors
misselling
money laundering
incorrect or insufficient reporting (e.g. regulatory)
transaction error
Reviewing and improving a bank’s internal processes as part of
operational risk management can improve its efficiency. Errors often
occur when a process is complicated, disorganized or easily
circumvented, all of which are also inefficient business practices.
11/16/12 11
12. Risk Management Process Feedback Loop
1. Identify, assess and
prioritize risks
6. Revise 2. Develop
policies and strategies to
procedures measure risk
5. Test
effectiveness 3. Design policies and
and evaluate procedures to mitigate risks
results
4. Implement
and assign
responsibility
11/16/12 12
13. There are four fundamental steps to managing operational risk, with
each step leading to improvements in management & control quality and
greater economic profit
REPORTING
• Integrated MIS
reporting
MEASUREMENT • Awareness of
• Estimation of annual exposures
losses – cost of • Knowledge of
operational failure controls quality
PROCESSES
• Estimation of VaR – • Cost benefit analysis
Economic Profit
• Loss data collection
risk capital • Improved risk
• Risk indicator data
• Estimation of scores mitigation and
FRAMEWORK collection
representing quality transfer strategy
• Risk strategy, • Control self- of internal controls
tolerance assessment
• Roles and • Risk assessment and
responsibilities analysis
• Policies and • Workflow
procedures • Automatic notification
• Risk definition and • Follow up action
categorization
Management & Control Quality
14. The universe of operational risks spans causes, events and
consequences
CAUSES EVENTS CONSEQUENCES
Inadequate Legal Liability
segregation of duties
Internal Regulatory, Compliance
Insufficient training Fraud & Taxation Penalties
External Loss or Damage
Lack of management
Fraud to Assets EFFECTS
supervision
Monetary
Employment Practices Losses
Inadequate Restitution
& Workplace Safety
auditing procedures
Clients, Products
Inadequate security Loss of Recourse
& Business Practices
measures
Damage to
• Physical Assets Write-down
• Business Disruption
& System Failures
• Reputation OTHER
Execution, Delivery & IMPACTS
Poor systems
Process Management Forgone
design
Business Interruption Income
Poor HR
policies
15. Using internal and external loss data can calculate Value at Risk
INDIVIDUAL RISK MATRIX FOR LOSS VAR TOTAL LOSS
LOSS EVENTS LOSS DATA DISTRIBUTIONS CALCULATION DISTRIBUTION
74,712,345 Frequency
74,603,709 of events
74,457,745
74,345,957
74,344,576 VaR
•
EMPLOYMENT CLIENTS, EXECUTION, BUSINESS
Calculator
PRACTICES & PRODUCTS & DAMAGE TO DELIVERY & DISRUPTION AND
INTERNAL EXTERNAL WORKPLACE BUSINESS PHYSICAL PROCESS SYSTEM
FRAUD FRAUD SAFETY PRACTICES ASSETS MANAGEMENT FAILURES TOTAL
Corporate Finance Nu mb er 36 3 25 36 33 150 2 315
0 1 2 3 4
Mea n 35,459 52,056 3,456 56,890 56,734 1,246 89,678 44,215
Standard Deviatio n 5,694 8,975 3,845 7,890 3,456 245 23,543 6,976
e.g.,
Trading & Sales Nu mb er 50 4 35 50 46 210 3 441
Mea n 53,189 78,084 5,184 85,335 85,101 1,869 134,517 66,322
Standard Deviatio n 8,541 13,463 5,768 11,835 5,184 368 35,315 10,464
•
Retail Banking Nu mb er 45 4 32 45 42 189 3 397
Mea n 47,870 70,276 4,666 76,802 76,591 1,682 121,065 59,690
Monte
Standard Deviatio n 7,687 12,116 5,191 10,652 4,666 331 31,783 9,417
Commercial Bankin g Nu mb er 41 3 28 41 37 170 2 357
Mea n 43,083 63,248 4,199 69,121 68,932 1,514 108,959 53,721
Standard Deviatio n 6,918 10,905 4,672 9,586 4,199 298 28,605 8,476
Payment & Settlements Nu mb er 37 3 26 37 34 153 2 321
Mea n 38,774 56,923 3,779 62,209 62,039 1,363 98,063 48,349
Carlo
Standard Deviatio n 6,226 9,814 4,205 8,628 3,779 268 25,744 7,628
•
Agency Services Nu mb er 44 4 31 44 40 184 2 386
Mea n 46,529 68,308 4,535 74,651 74,446 1,635 117,675 58,018
Standard Deviatio n 7,472 11,777 5,045 10,353 4,535 321 30,893 9,154
Asset Manag ement Nu mb er 40 3 28 40 36 165 2 347
167,245 Simulation
Mea n 41,876 61,477 4,081 67,186 67,002 1,472 105,908 52,217
Severity
Standard Deviatio n 6,725 10,599 4,541 9,318 4,081 289 27,804 8,238
Retail Brokerage Nu mb er 48 4 33 48 44 198 3 417
Mea n 50,252 73,773 4,898 80,623 80,402 1,766 127,090 62,660
Standard Deviatio n 8069 12719 5449 11182 4898 347 33365 9886
Engine
Insuranc e Nu mb er 43 4 30 43 39 179 2 375
Mea n 45,226 66,395 4,408 72,561 72,362 1,589 114,381 56,394
142,456 of loss
Standard Deviatio n 7,262 11,447 4,904 10,063 4,408 312 30,028 8,897
Total Nu mb er 435 36 302 435 399 1,812 24 3,806
Mea n 45,653 67,021 4,450 73,245 73,044 1,604 115,459 56,926
Mean 99th Percentile
Standard Deviatio n 7,331 11,555 4,950 10,158 4,450 315 30,311 8,981
123,345 Annual Aggregate Loss ($)
113,342
94,458
0-10 10- 20- 30- 40-
20 30 40 50
16. Composite control assessment/indicator scores can be used to modify
capital figures
CONTROL
ASSESSMENT/INDICATOR
VAR SCORE CAPITAL
Adjustment for
Quality of
Current Control
Environment
210 100 190
Current score
Previous score 50
0
Linking capital to changes in the quality of internal controls provides an incentive for
desired behavioral change
19. The Basic Indicator Approach
Banks using the Basic Indicator Approach must hold
capital for operational risk equal to the average over the
previous three years of a fixed percentage (denoted
alpha) of positive annual gross income.
Figures for any year in which annual gross income is
negative or zero should be excluded from both the
numerator and denominator when calculating the
average.
11/16/12 19
21. The Standardized Approach
In the Standardized Approach, banks’ activities are divided into eight business lines:
corporate finance, trading & sales, retail banking, commercial banking, payment &
settlement, agency services, asset management, and retail brokerage.
Within each business line, gross income is a broad indicator that serves as a proxy
for the scale of business operations and thus the likely scale of operational risk
exposure within each of these business lines.
The capital charge for each business line is calculated by multiplying gross income by
a factor (denoted beta) assigned to that business line.
Beta serves as a proxy for the industry-wide relationship between the operational risk
loss experience for a given business line and the aggregate level of gross income for
that business line.
It should be noted that in the Standardized Approach gross income is measured for
each business line, not the whole institution, i.e. in corporate finance, the indicator is
the gross income generated in the corporate finance business line
11/16/12 21
25. Advanced Measurement Approaches (AMA)
Under the AMA, the regulatory capital requirement will
equal the risk measure generated by the bank’s internal
operational risk measurement system using the
quantitative and qualitative criteria.
Use of the AMA is subject to supervisory approval.
A bank adopting the AMA may, with the approval of its
host supervisors and the support of its home supervisor,
use an allocation mechanism for the purpose of
determining the regulatory capital requirement
11/16/12 25
Editor's Notes
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How do we get started: Need Framwork, what is our risk strategy, who will do what, what will be done; Then must define your risks in a way that will be most inutitive for managers. Step II is to set up processes for collecting relavant information and remedial actions. Step III is to take this information and use it to estimate annual losses - cost of doing business, risk exposure (how much you need to set aside in capital reserves) and the quality of internal controls. Finally, we take this information and make it available to decision makers through integrated reports – so managers first becorme aware of their risks and their corresponding controls and can make informed decisions about how to manage these exposure. i.e., understand the costs and benefits of alternate risk mitigation and transfer strategies. (Should I buy a new order processing system, hire one more complice officer, or a consultant to validate my fixed income securities pricing model.) , The first step in the process or operational risk management is to identify roles and responsibilities of the key players, establish policies and procedures that will clarify, document and support the risk management process, formulate a risk strategy and set appropriate tolerances and define and categorize the basic elements that we are attempting to measure. Much more will be said about that last point in a short while. The next step is to develop the means to collect and control loss data and risk indicator data, perform a control self-assessment and risk indicator-based assessment, and to appropriately capture and manage the data that is both input to the process and created along the way. Measuremnt is the next concern, and the system estimates the cost of failure, the required level of risk capital, and those measures are combined with the control self-assessment and the risk indicator scores. Finally, the system provides integrated reporting capabilities which afford greater awareness of exposures, deeper understanding of loss trends, improved strategies for reducing, eliminating, or transfering out operational risk. A cost/benefit analysis capability is also provided.
As the previous slide illustrated, it is important to impose a basic structure on the problem, so as to define risk categories within the context of causes, events, and consequences.
This slide summarizes the process of how the system will: capture data on individual loss events map the data into a risk matrix, where the rows are organizational units, the columns are risk categories, and the entries in each cell correspond to the number of occurrences of events, the mean loss and standard deviation of loss Generate distributions corresponding to the frequency and severity of events for every cell in the matrix Perform a VaR calculation within each cell in the matrix Produce an annual aggregate loss distribution which provides both the expected loss (or cost of doing business) and the unexpected loss (the value at risk at the 99 th percentile–or our one out of one hundred years case! ) Remember, since operational risk events occur in one organizational unit, and since the categories are mutually exclusive, there is no correlation between the individual cells and so the total loss distribution can be summed over the entire matrix to provide an aggregate total annual loss distribution .
In assessing operational risk, it is important to incorporate consideration of the impact of internal controls. This slide points to an example, whereby the VaR calculator determines that $210MM of capital is required. However, we have a risk indicator/ control assessment score that measures the quality of the control environment. By linking changes in these scores, at the individual cell level, the amount of required capital is adjusted upwards or downwards, depending upon the direction and magnitude of the change. The example in this slide illustrates that a 10% improvement in score translates to approximately a ten percent, or $20MM, decline in required capital.
Gross income is defined as net interest income plus net non-interest income. It is intended that this measure should: (i) be gross of any provisions (e.g. for unpaid interest); (ii) be gross of operating expenses, including fees paid to outsourcing service providers; (iii) exclude realized profits/losses from the sale of securities in the banking book; and (iv) exclude extraordinary or irregular items as well as income derived from insurance.