1. Operational Risk

2. Operational Risk
Definition:
Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems. The failure may be due to external events also.
Excludes “Business Risk” and “Strategic Risk”.

3. Operational Risk
Basel I defined operational risk as,
Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.
Basel II, defined operational risk as,
Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
For emergence of such a risk four causes have been mentioned and they are
People, Process, Systems and External factors.

4. Components of Operational Risk
Transaction Processing Risk
Information Technology Security Risk
Legal Risk
Compliance Risk
Human Resources Risk

5. Components of Business Risk not Included in Operational Risk
Strategic Risk
Reputation Risk
Treasury Risk
Tax Risk

6. People Risk
Lack of key personnel,
Lack of adequate training/experience of dealer (measured in terms of opportunity cost/employee turnover),
Unauthorised access to the dealing room,
Tampering voice recorders,
Nexus between the front and back offices.

7. Process Risk
Wrong reporting of important market developments to the
Management resulting in faulty decision making
Errors in entry of data in deal slips
Non-monitoring of exposure in positions
Loss of interest owing to the liquidity beyond prescribed limits

8. Process Risk
Wrong reporting of important market developments to the management resulting in
Non-revision of rates in cases of volatility
Non-monitoring of closing and opening positions
Wrong funding of accounts (wrong currency)
Lack of policies in respect of new products

9. Systems Risk
Losses due to systems failure.
Not maintaining secrecy of system passwords.
Technology investment not made adequately.
Failure in systems development.
Lacuna in systems implementation.
Wrong judgment of system capacity.

10. External Risk
Legal and regulatory risk
Failure to enforce criminal proceedings
Outsourcing risk
Supplier risk
Infrastructure utilities failure
Treasury activities not complying with the regulatory requirement
Statutory obligation being not met
Political risk
Government risk

11. Operational Loss
Risk management focuses on large losses.
Historically large losses have been associated with credit risk and market risk.
Large losses also have a tendency to originate from business and operational failures.
Improving and stabilizing earnings for shareholders has to focus on controlling operational risk losses.

12. Operational Risk Loss Types
Legal Loss:
customer, employee and other third party law suits.
2 . Regulatory Compliance Loss:
Fines for non disclosure, cost of license revocations and other costs.
3 . Assets Loss:
Reduction in value non-financial asset such as property.

13. Operational Risk Loss Types
4 . Customer Compensarion:
Compensation payments (principal and/or interest) or other compensatory payments to customers.
5 . Fraud and Unauthorized Activities:
Rogue trading, Unauthorized loan sanctions.
6. Process Loss:
Late settlement, wrong counterparty deals. 13