This document discusses operational risk management. It defines operational risk as losses from failed internal processes, people, or systems or external events. It identifies types of operational risks such as people risk, process risk, technology risk, and external risks. It also lists common causes of operational risk like fraud, workplace safety issues, and system failures. Finally, it outlines three approaches used in banking to measure and hold capital reserves for operational risk: the Basic Indicator Approach, Standardized Approach, and Advanced Measurement Approach.

1. Risk Management
University of Economics, Kraków, 2012
Tomasz Aleksandrowicz

2. operational risk management
credit risk definition
credit bureau and rating agencies
credit risk management

3. operational risk
• risk of loss resulting from inadequate or failed
internal processes, people and systems or from
external events
• operational risk is much harder to identify than
market and credit risk

5. people risk
• Employee collusion/fraud
• Employee error
• Employee misdeed
• Employers liability
• Employment law

6. process risk
– Transaction Risk
– Documentation/contract risk.
– Operational Control Risk
– Model Risk

7. technology risk

8. external risk

9. causes of operational risk
• Internal fraud
• External fraud
• Employment practices and workplace safety
• Clients, products and business practices.
• Damage to physical assets.
• Business disruption and system failures
• Execution, delivery and process management

10. 3 approaches in banking

11. key risk indicators

12. basic indicator approach
• simplest operational risk measurement method
• banks has to hold capital reserves for operational loss
• average income gross income from previous 3 years times
given percentage (alpha)
• years with negative or zero income excluded
• committee alpha percentage – 15% (represents industry
average operational risk)
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13. Standardized Approach
• more complex method of operational risk measurement
• banks has to hold capital reserves for operational loss
• three-year average across each of the business lines in each
year times given percentage (beta)
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14. standardized Approach – beta factor
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15. advanced measurement approach
(AMA)
• comprehensive method based on bank’s internal operational
risk measurement system
• quantitative and qualitative criteria
• subject of regulatory approval
• bank must be able to demonstrate that its approach captures
even unlikely events
• minimum five-year observation period of internal loss data
• external data could be used
• high-severity events must be subject of scenario analysis and
use external data and expert advisory
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