Then, to each step of the process, we assign the incidents likely to disrupt its unfolding and prevent the achievement of its objectives (in terms of concrete results, or in terms of time). Statistical methods are somehow biased, or even dangerous, in the way they can build calculations (sometimes extremely sophisticated) on few, scattered sampling data, and based on a number of subjective assumptions. However, spectacular failures, like Baring's, have attracted the attention of regulators on the need to provide banks with prevention and coverage mechanisms against operational risks (through the allocation of dedicated capital). Basel II Type of Risk Basel II was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks face. In that respect, the scorecard method provides an interesting alternative, since it does not rely on actual registered loss data, but on risk indicators, which thereby support a "before the fact" vision of operational risks. The Committee is seeing sound operational risk governance practices adopted in an increasing number of banks. 0000011108 00000 n Since there are 13 risk categories as defined in Basel 2 and questionnaires contain at least 20 questions and there may be dozens of departments involved in large financial institutions, this results in a considerable amount of data to go through. 2. 0000018906 00000 n operational risk (Figure 1). Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, The reporting and monitoring tasks mean an extra burden for operational staff. � s8��`����aR��h�j�8��01�,�e@,�@2�s�H�P�F7�5����MTe��l��z��0��i�.���ǖ1s�4��(Z��PĞ�/������ݡ�=��=�J�F� ���AR�� � r����@$��KP���i�����R ��s�#'�a�� ��W30�le g���00^ɳ30���B6�k>���'����v��_�]�n7�a���l����n. This changing risk profile, combined with a recent shift of focus away from capital measurement towards risk management, means that many organisations are updating their operational risk taxonomies. 0000002694 00000 n Operational risk scorecards have been in the spotlight since the Basel Committee on Banking Supervision’s 2001 paper on op risk treatment under Basel II. Purpose-The new regulation "The New Basel Capital Accord" which has been created in order to eliminate the shortcomings of Basel I, in 1999, Basel II, aimed to modify each bank's own criteria, regulatory activities and preferences, 0000016679 00000 n 0000004983 00000 n 0000017137 00000 n A business process is a set of coordinated tasks, which aim at providing a product or service to customers. The article “Basel II approaches for the calculation of the regulatory capital for operational risk” is devoted to the issue of operational risk of credit financial institutions. This first evaluation should normally be slightly overestimated, because afterwards we only use scorecards to change the global amount of allocated capital. Globally, evaluation methods are related to 3 major families, which are not necessarily mutually exclusive as we will see below: statistical methods, scenario-based approaches and scorecard approaches. The available tools to monitor operational risk either incorporate the qualitative approach (risk map) or the quantitative approach (database of incidents and statistical analysis of historical data), preferably both. One of the main innovations of the Basel II agreement compared to Basel I has been not only to require allocation of capital to cover operational risk but also to advocate for an operational risk management system. It is then time to collect the observed incidents in a historical database, which allows to evaluate the actual losses caused by operational risks (loss data). the significance of risks other than credit and market risks (Basel Committee, 2005a), such as operational risk, which had been at the heart of som e im portant banki ng problems in the past. :���+˽J:?ex-�U��5Q�i#�����Y����n�8��d�8��ML�m�� �� � ��I In order to obtain a more realistic measurement, a sampling of data obtained from other institutions is added. In order to validate the choice of a mathematical model, we compare the result (frequency or loss) predicted by the model to the output of the curve built from real data: if both curves overlap, the model is considered as reliable. 0000018779 00000 n Finally, the map would not be complete if it did not come with the identification of key risk indicators: these are quantifiable elements that may increase the likelihood of the occurrence of a risk : number of transactions processed, absenteeism rate, etc. 0000005284 00000 n Publications and updates by the Basel Committee on Banking Supervision (BCBS), including on topics related to the Basel II Framework and its implementation. endstream endobj 919 0 obj <>/Filter/FlateDecode/Index[179 663]/Length 45/Size 842/Type/XRef/W[1 1 1]>>stream 0000016216 00000 n 0 0000017481 00000 n 0000019092 00000 n 0000015691 00000 n The definition of business processes primarily corresponds to a business-oriented analysis of the activity of the bank, and not to an organisational analysis. The final rules came a year later than anticipated and more than three years after the first consultation on operational risk in October 2014. The first step in the process of monitoring operational risk is to establish a risk map. These questionnaires are designed by expert teams grouping risk specialists and operational people of each business line. This method consists in building an assessment grid for each category of risk, made up of quantitative indicators: turnover, number of operations... and qualitative indicators: estimation of the speed of change in an activity, for instance. There also exist similar databases, but coming from external sources. 0000018203 00000 n 0000004900 00000 n D�u1� `�) G0g��ޮ�V�A�W�}���� �7D��iQR�LLۯ�@�sg�Z���� ��Ϙ��H��Q��MB; ! Operational risks can be mitigated efficiently if bankers learn the core operational vulnerabilities of their businesses, and set the risk indicators accordingly. Operational Risk (OR) is the risk of direct and indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. For each event, risk is assessed in terms of: Each event with possible risk must be assigned to a risk category (making future data analysis easier and faster) and, in organisational terms, to the business line where the incident would occur. 0000017606 00000 n The Basel II Framework envisages that, over time, the operational risk discipline will mature and converge towards a narrower band of effective risk management and risk measurement practices. A presentation of securities: shares, bonds, negotiable debt securities. operational risk as the \"risk of loss resulting from inadequate or failed internal processes 13. Then we combine both distributions, using a Monte-Carlo simulation, in order to obtain for each business line and each type of event, an aggregated curve of the loss distribution for a given time horizon. The goal is to obtain from these experts an evaluation of the probability and cost of operational incidents, as identified in the analytical framework proposed by the Basel committee. Moreover, these methods, which rely exclusively on historical data, do not allow to anticipate changes in the risk profile of the bank due to internal evolutions (new organisations, new activities) or external evolutions (changes in markets, competitors, emergence of new fraud techniques). 0000000016 00000 n 0000007111 00000 n ���d(p�97ߩ�䢣��"�����q0N8��`�c�����$�B�-� The amount of capital is then allocated to each risk category by evaluating for each business line the relative importance of each category. These data however require an effort of analysis and adjustment to the specific situation of the bank. The classification of risks must match the high-level view desired by the management, it must allow synthetic analyses that are transverse to all activities and as such should be established by a central risk management department. Basel Committee on Banking Supervision, 2004 . Data collection of loss events relies on the previously established map to register and reference incidents. Losses arising from disruption of business or system failures. 0000015805 00000 n Besides, the Basel committee took particular care to define a standard classification of business lines and operational risks. The initial identification of risks results in a "theoretical" map of activities, however experience only allows first, to validate this description and second, to identify sensitive areas of activity in order to put in place appropriate controls. all risk categories and that operational risk assessment is simply a vehicle for the continual improvement of controls governing the management of all other risk types. Indeed the statistical approach described above has the drawback of considering operational incidents as completely uncorrelated, and does not take into account possible cumulative effects. In other words, its scope seems so wide you do not immediately perceive the practical application. 0000019147 00000 n Abstract: The final version of the New Capital Accord, which includes operational risk, was released by the Basel Committee on Banking Supervision in June 2004. This concept is at the core of the so-called "scorecard method" (see below). 0000006876 00000 n 0000015281 00000 n 0000017344 00000 n Categories (Level 2) Activity (Level 3) Insurance activity examples. Any IT project should therefore consider operational risk aspects. POLICY ADVICE ON THE BASEL III REFORMS: OPERATIONAL RISK 5 information necessary to address Sections 5.3 and 5.5, the EBA launched a qualitative questionnaire and arranged an operational risk technical roundtable with banks and banking associations. Define mitigation measures to be taken in order to reduce risks. 0000006000 00000 n Losses arising from loss or damage to physical assets from natural disaster or other events. For each of the resulting distributions, we look for the mathematical model that best represents the shape of the curve. Therefore, it is basically a "Value at Risk" (VAR). 0000019553 00000 n 0000018063 00000 n Basel 2 offers banks three capital calculation methods of increasing complexity. The most widely used definiti on of ‘operational risk’ used in the financial services industry is the one published by the Basel Committee on Banking Supervision : How do we define ‘Operational Risk’? Furthermore we note the development of information systems dedicated to operational risk management. Deloitte’s banking specialists can help you build advanced capabilities that take your operational risk management framework beyond compliance. <]/Prev 119360/XRefStm 2694>> Capital requirement for credit risk 16 b. 0000001914 00000 n 0000015128 00000 n The implementation of control measures and action plans then results from a compromise between enforcement cost and obtained risk level. Finally, the questionnaires are distributed to business lines and filled out. 0000018669 00000 n As a result of the examination of this data, it is possible to establish a "score" for each business line in each category of operational risk, and thus allocate it its due proportion of regulatory capital. Market liquidity risk is a type of market risk. 0000016910 00000 n 842 79 Operational risk has been defined by the Basel Committee on Banking Following this, it was clear that complementary cause and impact categories would support the understanding and use of the Event Type Taxonomy. Operational people fill out standardised forms, which are later captured in a database, or they directly enter data in the application. Risk management is: ... four main categories, namely operational risk, financial risk, environmental risk and reputational risk. 0000015073 00000 n Reﬂecting that risks other than credit and market risks can be substantial, operational risk are now explicitly concerned by the New Basel Capital Accord. Repeating this process allows to change in time the amount of capital allocated to each business line. 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