6 Operational Risk

7/29/2019 6 Operational Risk

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Operational Risk Management

Himanshu Puri

Assistant Professor (Finance)

IILM CMS


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Operational Risk

Loss resulting from inadequacies andfailures in the internal processes, people andsystems or from external events.

STRATEGIC RISK AND REPUTATION RISK ARE NOT

CONSIDERED PART OF THIS OPERATIONAL RISK Strategic risk: arises from the adverse business decisions,

improper implementation of decisions or lack ofresponsiveness to industry changes. Eg. Fixing the rate ofinterest wrt to credit ratings accepting lower credit ratings

(sub-prime), Reputation Risk: due to negative public opinion. Eg bank

demurs while paying the BG/ LC beneficiaries, Luke-warmattitude towards customers,

Scope of Operational risk is very wide.3/8/2013 2


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Comprehending Operational Risk

Operational risk exists almost everywhere inthe organization

Operational risks vary in their components.Some are high occurrence low value risks,

while some are low occurrence and highvalue risk

Operational risks in the organizationcontinuously change especially when anorganization is undergoing changes, like

after merger.


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Cause based Operational Risks

People oriented causes negligence, incompetence,insufficient training, integrity, ethical values, keyperson

Process oriented (transaction based) causesbusiness volume fluctuation, organizationalcomplexity, product complexity and major changes.

Process oriented (Operational control based) causes inadequate segregation of duties, lack ofmanagement supervision, inadequate procedures.

Technology oriented causes poor technology andtelecom, obsolete applications, lack of automation,information system complexity, poor design,development and testing

External Causes natural disasters, operationalfailures of a third party, deteriorated social or political

context.


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The Third Consultative Paper recommended

for event based classification

Internal fraud

External fraud

Employment practices and workplace safety Clients, products and business practices

Damage to physical assets

Business disruption and system failure

Execution, delivery and process management


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Risk Monitoring and

Controlling Collection of operational risk data (incident

reporting framework circulating to all thebranches and cautioning them)

Regular monitoring and feedback mechanism inplace for monitoring any deterioration inoperational risk profile.. (balancing of booksand internal audit systems)

Collation of incident reporting data to assessfrequency and probability of occurrence of

operational risk events. Monitoring and control of management of large

exposures.

Documents

6 Operational Risk