W4-Operational Risk.pptVIP

Operational Risk * Definition of Operational Risk “Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events” Basel Committee - January 2001 Operational risk can arise from many factors ranging from routine processing errors to potentially costly incidents related to, for example, major systems failures * What Operational Risk Includes The definition includes people risks, technology and processing risks, physical risks, legal risks, etc. The definition excludes reputation risk and strategic risk * Basel Committee * The Basel Committee is an institution created by the Central Bank Governors of the Ten nations. It was created in 1974 and meets regularly four times a year. Belgium, Canada, France, Italy, Japan, Netherlands, United Kingdom, United States, Germany, Sweden The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision The purpose of the committee is to encourage convergence toward common approaches and standards Categorization of risks 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 * Bank Example:Categorization of Business Lines Corporate finance Trading and sales Retail banking Commercial banking Payment and settlement Agency services Asset management Retail brokerage * 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 How to estimate and measure the risks? Advanced Measurement Approach (AMA): Banks need to estimate their exposure to each combination of business line and type of risk Ideally this will lead to 8×7=56 VaR measures that can be combined