1. Operational and Technology Risks
Presented by
R 沈子喬
R 陳禹君
R 蔡少懷

2. I n d e x Part I The Introduction to Operational Risk
Part II Operational Risk in BaselⅡ
Part III Operational Risk Management In Practice

3. Introduction to Operational Risk
Step 1: An idea of operational risk
Step 2: Technology and Financial Service
Step 3: The Effect of Technology on Revenues and Costs!
Step 4: Technology in Payments System
Step 5: Managing Operational Risk

4. Introduction to Operational Risk
Part I
Introduction to Operational Risk
Difficult to measure, yet crucial！

5. An idea of Operational Risk
Major risks faced by banks!
Source: The New Basel Capital Accord: Basel II, Jan 2001

6. An idea of Operational Risk
direct and indirect
What is Operational Risk ?
Operational risk and inclusive of technological risk is the risk of
loss resulting from inadequate or failed internal processes、
people、and systems or from external events.
Definition by BIS,Working Paper on the Regulatory Treatment of Operational Risk, Sep, 2001
Some FIs add “Reputational risk and strategic risk as part of a
broader definition (e.g., due to a failed merger).

7. An idea of Operational Risk
What are the source of Operational Risk ?
1.    Technology (e.g., technological failure and deteriorating systems)
2.    Employees (e.g., human error and internal fraud)
3.    Customer relationships (e.g., contractual disputes)
4.    Capital assets (e.g., destruction by fire or other catastrophes)
5. External (e.g., external fraud)

8. Introduction to Operational Risk
A summary of operational risks faced by FIs
Employee Risk
External Risk
Employee turnover
Key personnel risk
Fraud risk
Error
Rogue trading
Money laundering
Confidentiality breach
External fraud
Taxation risk
Legal risk
War
Collapse of markets
Reputation risk
Relationship risk
Table 14-8
Technology Risk
Programming error
Model risk
Mark-to-market error
Management information
IT systems outage
Telecommunications failure
Technology provider failure
Contingency planning
Customer Risk
Capital Asset Risk
Safety
Security
Operating Costs
Fire / flood
Contractual disagreement
Dissatisfaction
Default

9. An idea of Operational Risk The effects of operational failure!
How can operational failure affect an FI?
Tearful Lessons!!
The effects of operational failure!
楊瑞仁在國票案中吞占國票１０２.２億元
國 票 案
資深法務人員(劉偉杰)監守自盜３０億元
理 律 案
年僅28歲的高級期貨交易員Nick Lesson，以短短2年半的時間，搞
倒具有232年歷史的霸菱銀行，最後落得以1英鎊象徵性的價格，
被荷蘭國際銀行（ING）所收購。
霸 菱 案

10. Technology and Financial Service
The most important factor affects the profitability and riskness
of modern FIs.
Technology
The application of computers, audio and visual communication
systems, and other information systems to an FI’s production of
service.
1.   Lower costs by combining labor and capital in a more efficient mix.
Increased revenues by allowing a wider array of financial services to be produced or innovated and sold to customers.

11. Technology and Financial Service
How modern technology affect an FI’s profit-producing area ?
Wholesale Financial Services
Technology improves FIs’ abilities to provide cash management
or working capital services to corporate customers, who start to
recognize that:
Excess cash balances result in a significant opportunity cost.
Corporate need to know cash or working capital position on
a real-time basis.

12. Technology and Financial Service
企業金融 Wholesale Financial Services
The services provided to help corporate customer manage their financial position.
Controlled disbursement accounts.
Account reconciliation.
Wholesale lockbox.
Electronic lockbox
Funds concentration.
Electronic funds transfer
Check deposit services
Electronic initiation of letters of credit.
Treasury management software.
Electronic data interchange
Facilitating business-to-business e-commerce
Electronic billing
Verifying identities
Assisting small business entries into e-commerce.

13. Technology and Financial Service
企業金融 Wholesale Financial Services
In Taiwan, banks offer such service for corporate customers as follows:
一般企業金融產品
資本市場金融產品
企業電子金融產品
資金管理
風險管理
外匯業務
OBU國際金融業務
授信業務
信託業務
台幣資本市場金融產品
外幣資本市場金融產品
金融電子資料交換系統 (FEDI)
企業資金管理系統
企業貸款集中支付管理系統
整批轉帳系統
人事薪資管理系統
股利代發管理系統
各種轉帳代收業務

14. Technology and Financial Service
個人金融 Retail Financial Services
A typical customer transaction through a branch or phone call costs a customer about $1, while a similar online transaction costs just $0.02 !
Researched by Merrill Lynch
Some of the most important retail payment product innovations include:
Paying bills via telephone
Smart-cards (store-value cards)
On-line banking
billing
Automated teller machines (ATMs)
Point-of-sale (POS)
Home banking
Preauthorized debits/credits.

15. Technology and Financial Service
By virtue of technology
FIs no more made money only by
interest spread earnings
They are financial service provider now !

16. The Effect of Technology on Revenues and Costs!
Interest income - Interest expense
Other income- Noninterest expense
Provision for loan losses
Earnings or Profit before taxes
Profit Function + - =
Technology can improve FI’s profitability through means of:
Increase
Interest Income
Lower
Interest Expense
Increase
Other Income
Decrease
Noninterest Expense
Link to interbank lending market.
b) Originate and sell commercial paper, entering lower-cost funding market.
Offering innovative products and better payment system
Electronic
processing
and storage
system
Cross Selling
(Data Mining)

17. The Effect of Technology on Revenues and Costs!
Earnings and Other Data for All Insured Banks
Update Table 14-1
Source: Federal Deposit Insurance Corporation website

18. The Effect of Technology on Revenues and Costs!
Noninterest income of
banks increase steadily.
Underscoring the importance
of operating costs is the fact
that non-interest expenses
gradually exceeds interest
expense.

19. The Effect of Technology on Revenues and Costs!
Make or Break?
Profitability V.S. Technology!
Product revenue side
Operating cost side
The effect of regulation and regulatory changes
can not be ignored!

20. The Effect of Technology on Revenues and Costs!
Technology on product revenue side
1.  Cross-marketing both new and existing products to customers.
2.  Increase the rate of innovation of new financial products.
3. Service quality and convenience.

21. The Effect of Technology on Revenues and Costs!
Technology on Operating cost side
In general, technology may favorably affect an
FI’s cost structure by allowing it to exploit either
economies of scale or economies of scope.

22. The Effect of Technology on Revenues and Costs!
Economies of scale
As the output of an FI increases, its average costs of production fall.
ACi = Average costs of the ith FI
TCi = Total costs of the ith FI
Si = Size of the FI measured by assets,
deposits, or loans.
Cost-lowering effects of
technology on FIs of all size but
with the greatest benefit
accruing to those of the largest
size.

23. The Effect of Technology on Revenues and Costs!
Economies of scale
Yet FIs may face diseconomies of scale and other shape of AC function!
Diseconomies of scale!
As the output of an FI increase, its average costs of production increase. (e.g. Excess capacity, integration problems, cost overruns, cost control problems)
S* is the most efficient size for an FI to invest.

24. The Effect of Technology on Revenues and Costs!
Economies of scope
The FI’s abilities to generate synergistic cost savings
through joint use of inputs in producing multiple products.
ACA+B [X1, X2] < ACA[X1,0] + ACB[0,X2]
Nevertheless, diseconomies of scope may occur instead!

25. The Effect of Technology on Revenues and Costs!
Testing for Economies of Scale and Economies of Scope
FIs must specify both the inputs to their production process and the cost of those inputs
The Production Approach
C = f (y, w, r)
w = Wage costs of labor
r = Rental costs of capital
y = Output of services
The Intermediation Approach
C = f (y, w, r, k)
k = The cost of funds for the FI.
The intermediary uses to
produce intermediated service.

26. The Effect of Technology on Revenues and Costs!
Can earnings always exceed expense?
Investment on technology allows an FI to earn potentially higher profits, but not for sure because:
NPV (Technology investment project) <０.
The initial cash outlay and future costs related to these investments are unable to be offset.
Io = Initial capital outlay for developing an innovation or product at time 0
Ri = Expected net revenues or cash flows from product sales in future years i, i = 1…..N
d = FI’s discount rate reflecting its risk-adjusted cost of capital
Agency Conflicts
A growth-oriented investment may be in consistent with
stockholder’s value-maximizing objectives.

27. The Effect of Technology on Revenues and Costs!
Empirical Findings
Only a small part of the cost differences among FIs in any size class can be economies of scale or scope.
A majority of the studies shows the relatively low payoff from technological innovation.
Large FIs tend to be more efficient in revenue generation than smaller FIs and that such efficiencies may well offset scope and scale cost inefficiencies related to size.
Real benefits of technological innovation are difficult to measure through traditional studies.

28. Technology in Payments System
American Practice
The two dominant wire transfer systems are
Fed wire operated by Federal Reserve
Privately operated Clearing House Interbank Payments System (CHIPS)
Table 14-5
In 2000
The average daily Fedwire funds value
$1.5 trillion
The average daily CHIPS value
$1.2 trillion
This trend can partly be attributed to the
development of “sweep accounts”.
Sweep accounts
Customers can automatically switch funds from high-reserve requirement checking accounts into low-reserve requirement savings accounts

29. Technology in Payments System
6 major risks have arisen along with the growth of wire
transfer systems.
Daylight Overdraft Risk
International Technology Transfer Risk
Crime and Fraud Risk
Regulatory Risk
Tax Avoidance
Competition Risk

30. Technology in Payments System
1. Daylight Overdraft Risk
A possibly greatest potential sources of instability in the financial markets today!
Daylight Overdraft
When a bank’s reserve account at the Fed becomes negative within the banking day.
Under Federal Reserve Act, the member bank’s end-of day reserve position cannot be negative.

31. Technology in Payments System
1. Daylight Overdraft Risk
Large banks seek to borrow funds in the afternoon to cover
for running daylight overdraft.
Under regulation J, the Fed guarantees payment
finality for every wire transfer message.
Fedwire
All within-day transfers are provisional, and
become final only at the end of the day.
CHIPS
Settlement failure could result in disastrous systemic crisis.

32. Technology in Payments System
1. Daylight Overdraft Risk
The efforts to alleviate daylight overdraft risk.
CHIPS members contributed to a special escrow fund.
2. Implementing Regulation F: Banks, thrifts, and foreign banks must develop internal procedures of benchmarks to limit their settlement to other FIs.

33. Technology in Payments System
1. Daylight Overdraft Risk
What happens in Taiwan…
Negative Intervention (負數操作)
存款準備金的提存期間為一個月，銀行雖然每日計算當日超額準備的變化，但並
不需要每日提足至法定水準，只要至每月3日的最後期限，銀行提存的存款準備積數
總額，能補足應提的法定額度即可。
因此銀行於月初行性支出高峰時，市場資金水位下降，銀行實提準備低於應提準
備的水準，造成負數缺口，於短期利率上揚時，擴大準備部位負數缺口，將資金投
入票券等短期投資，待中旬資金寬鬆、短期利率走低之際，再從事正數操作，出脫
手中票券，以填補部位缺口。

34. Technology in Payments System
2. International Technology Transfer Risk
The prohibition of the use of technological innovations limits
FIs’ profitability.
3. Crime and Fraud Risk
Wire transfers as methods of payment has resulted in new
problems regarding theft, data snooping, and white-collar
crime. (e.g. ATM card fraudulent duplication)

35. Technology in Payments System
4. Regulatory Risk
The government regulation imposed in the adoption of some
financial service limits FIs’ profitability.
5. Tax Avoidance
Internal pricing mechanisms minimize firms’ tax burden, yet
erode governments’ tax base. (e.g. BVI account)
6. Competition Risk
Technology eposes existing FIs to the increased risk of
erosion of their franchises as costs of entry fall and the
competitive landscape changes. (e.g. 裕融企業,會計事務所介入保管業務)

36. Technology in Payments System
Taiwanese Practice
The role of FISC
(Financial Information Service Co. LTD. )
財金資訊公司前身為「金融資訊服務中心」（簡稱金資中心）。民國七十三年十月財政
部為促進金融業之資源共享、資訊互通、並提昇整體金融自動化層面，經報奉行政院核
定設立金資中心，負責全國金融機構跨行資訊網路之規劃、設計、建置工作。主要業務
為金融機構跨行資訊系統的規劃開發及跨行資訊網路的營運。
‧ 金融機構跨行資訊系統之營運。
‧ 金融機構間跨行業務之帳務清算。
‧ 辦理與金融機構間業務相關之各類資訊傳輸、交換。
‧ 金融機構間資訊系統災變備援之服務。
‧ 金融機構間業務自動化之規劃、諮詢及顧問業務。
‧ 其他經財政部指定或核准辦理之有關業務。

37. Technology in Payments System
Taiwanese Practice
The business lines:
自動化機器共用系統
通匯系統
信用卡服務系統
金融XML業務
FEDI服務系統
代繳代發系統
網際網路作業系統
資訊媒體儲存服務
行動銀行服務系統
資訊查詢系統
轉帳卡服務系統
I C金融卡服務系統
資訊系統災變備援服務
What is FEDI ？
金融電子資料交換（Financial Electronic Data Interchange，FEDI、金融EDI）係指企業或個人利
用電腦作業，以特定的標準格式（採用聯合國UN/EDIFACT所制定的標準訊息），經由專線撥接與
銀行直接連線，在安全無虞的環境下進行企業或個人的付款、轉帳等資金調撥作業。

38. Technology in Payments System
Taiwanese Practice
Who is in charge of its failure !!
10 / 20/ 所有銀行的跨行轉帳全面“癱瘓”
通訊控制機故障
前員工及外包人員三人和偽卡集團勾結，外洩信
用卡持卡的人資料，遭這個信用卡偽卡集團盜刷
的金額，超過30億元
信用卡內碼資料外洩

39. Technology in Payments System
Technological innovation serves to provide completely
different financial services, yet it also exposes FIs’ to the
risks of a distinct category.
The Operational Risk
The risk that FIs’ can ignore no more!

40. Managing Operational Risk
The efforts to help FIs manage losses due to operational risk.
Loss Prevention
Training, development, and review of employees
Planning, organization, back-up.
(e.g., computer systems.)
Loss Control
External insurance.
(e.g., catastrophe insurance)
Loss Financing
Loss Insulation
FI capital.
Figure 14-6
Operational Risk Management Effort
RME: Extent of risk management efforts

41. Managing Operational Risk
Regulatory Efforts to manage operational risk
The issues brought..
1. Customer Protection
a. Does FI customers have the right to opt out of any private information
sharing an FI may want to pursue?
依據法令規定，金控集團旗下子公司可以交叉分享包括姓名、生日、身份證字號與電話
地址的基本客戶資料。子公司如果想相互分享客戶金融交易細節，必須事前向客戶得到書
面同意。
但若消費者買的是結合銀行、證券、保險等功能的綜合性商品，就不得不向金控集團旗
下的各個子公司，透露攸關個人財富與金融交易的資訊。例如，中信金控的「萬股通」，
可連結往來券商進行自動跨券商轉帳作業，並提供最高50萬元新台幣的金融卡信用額度，
自動結合補差額功能。因此「萬股通」客戶的帳戶資料，將會同時透露給中信金控旗下的
銀行與券商。

42. Managing Operational Risk
Regulatory Efforts to manage operational risk
The issues brought..
1. Customer Protection
b. Do Internet transactions and electronic storage of
private information expose FI customer to the security risk.
電腦處理個人資料保護法
　　但我國執法不力，以致造成花旗銀行資料外洩的情況，嚴重危
害金融交易的安全性。

43. Managing Operational Risk
Regulatory Efforts to manage operational risk
２. 　Operational Fisk and FI Insolvency
FIs have lost over $ 200 billion due to operational risk since 1980.
Researched by Operational Research Inc.
Operational risks “are sufficiently important for banks to devote
resources to quantify the level of such risks and to incorporate
them into their assessment of their overall capital adequacy.”
Basel Committee on Banking Supervision in 1999 Basel Committee

44. I n d e x Part II Operational Risk in BaselⅡ
Part I The Introduction to Operational Risk
Part II Operational Risk in BaselⅡ
Part III Operational Risk Management In Practice

45. Operational Risk in BaselⅡ
Loss Data Collection
Structure of Basel Ⅱ for “OpRisk”
Pillar 1 : (MRC) Minimum Required Capital
Basic Indicator Approach (BIA)
Standardized Approach (SDA)
Advanced Measurement Approach (AMA)
Pillar 2 : Supervisory Review Process
Pillar 3 : Disclosure
Operational Risk in BaselⅡ

46. Loss Data collection
Breaking loss data into “Business Lines” and “Event Types”.
Operational Risk in BaselⅡ

47. Business line / event types classification
BUSI-NESS UNITS
Level 1 Business Lines
Internal Fraud
External Fraud
Employment Practice
&
Workplace Safety
Clients, Products
& Business Practices
Damage to Physical Assets
Business Disruption
& System Failures
Execution, Delivery & Process Mgt.**
Invest-ment Banking
Corporate
Finance*
Trading & Sales
Banking
Retail Banking
Commercial
Payment &
Settlement
Agency Services & Custody
Others
Asset Mgt.**
Retail Brokerage
Commercial banking(商業金融)
商業銀行
e.g.貸款保證專案融資
Retail banking(消費金融)
消費銀行
私人銀行
卡片服務
Agency services & Custody (代理業務) 保管 代理 信託
Sales & trading(財務交易與銷售) 銷售 報價
部位持有 財務
Corprate finance(企業財務規劃)
公司理財
政府財務
商人銀行
諮詢服務
Retail brokerage(消費經紀)
零售經紀
Asset management(資產管理)
全權委託資金管理
非全權委託資金管理
Payment & settlement(收付清算)
外部客戶服務
Joint Combination
Including Municipal/Gov’t Finance and merchant banking ** Mgt. = management
Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,” September

48. Business line / event types classification
BUSI-NESS UNITS
Level 1 Business Lines
Internal Fraud
External Fraud
Employment Practice
&
Workplace Safety
Clients, Products
& Business Practices
Damage to Physical Assets
Business Disruption
& System Failures
Execution, Delivery & Process Mgt.**
Invest-ment Banking
Corporate
Finance*
Trading & Sales
Banking
Retail Banking
Commercial
Payment &
Settlement
Agency Services & Custody
Others
Asset Mgt.**
Retail Brokerage
Employment Practice & Workplace Safety (員工作業、工作場所安全)
因違反雇用、健康或安全規定及協議、支付個人損害求償或差異性/歧視事件所導致的損失。
e.g. 薪資/福利/所有歧視行為
Business Disruption & System Failures 　(營運中斷與電腦當機)
因營運中斷與電腦當機所導致之損失。
e.g. 硬體/軟體/通訊/水電
Business Disruption & System Failures 　(執行運送及作業流程之管理)
與交易對手或賣方交易之處理不當或過程管理疏失所導致之損失。
e.g. 錯帳/不精確的外部報告/與同業交易處理不當/未經授權接觸資料
Damage to Physical Assets (人員或資產損失)
因天然災害或其他事件所導致之實質資產減損。
Internal fraud(內部詐欺)
至少有一名公司內部人員參與，意圖詐取、侵占公司財產、規避法令或公司內部規範所導致的損失。
e.g. 匿報交易/挪用公款/盜取盜用資產
External fraud(外部詐欺)
外部人員意圖詐取、侵占公司財產、規避法令或公司內部規範所導致的損失。
e.g. 偽造/駭客攻擊
Clients, Products & Business Practices (客戶、產品、營運慣例)
非故意或疏忽而對特定客戶未盡專業義務、或因產品特性及設計所導致之損失。
e.g. 強制性行銷/產品瑕疵/未依規對客戶徵信
Joint Combination
Including Municipal/Gov’t Finance and merchant banking ** Mgt. = management
Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,” September

49. Structure of Basel Ⅱ for “OpRisk”
Pillar 1. (MRC)
Minimum Required Capital
Pillar 2. Supervisory
Pillar 3. Disclosure
The 2001 New Basel Accord (including Operational Risk)
Definition of Operational Risk
Data Collection & Category
Basic Indicator Approach (BIA)
Advanced Measurement
Approach (AMA)
Standardized Approach
(SDA)
Capital charge for operational risk:
-12% of MRC
-17-20% of Gross income
Operational Risk in BaselⅡ

50. Structure of Basel Ⅱ for“OpRisk”
2001 Basel Ⅱ, and Implement at 2006
Operational Risk in BaselⅡ

51. Pillar 1. Basic Indicator Approach (BIA)
Where：
KBIA = the capital charge for OpRisk under the BIA
EI = the level of an exposure “indicator” for
the whole institution, provisionally gross income
α = a fixed percentage, set by the BIS,
relating the industry-wide level of required capital
to the industry-wide level of the gross income.
Operational Risk in BaselⅡ

52. Little Discussion about “Indicator”
The indicator serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines.
Indicator--Gross Income
Net interest income
Net non-interest income
Fees & Commission
Net P&L from financial operation
Other income
Operational Risk in BaselⅡ

53. Little Discussion about “α”
α is estimated based on industry (Banking) data.
j :Bank
Where
MRCj : Minimum Regulatory Capital for bank j
EIj : Exposure indicator(gross income) for bank j
Capital charge for operational risk:
-12%of MRC
-17-20% of Gross income
Operational Risk in BaselⅡ

54. Pillar 1. Standardized Approach (SDA)
Where：
KTSA = the capital charge under the SDA
EIi = the level of an exposure “indicator” for each
of the 8 business lines
βi = a fixed percentage, set by the Committee,
Operational Risk in BaselⅡ

55. Pillar 1. Standardized Approach (SDA)
Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,”
September
Operational Risk in BaselⅡ

56. Little Discussion about “β”
β is estimated based on industry (Banking) data.
j :Bank i : Business lines β
The beta for bank for business line
MRC
The Minimum Required Capital for bank
Business line weighting
The weight of each business linei’s size
over total business lines’ size.
Capital charge for operational risk:
-12%of MRC
-17-20% of Gross income
Operational Risk in BaselⅡ

57. An estimation result of β
Operational Risk in BaselⅡ
Analysis of QIS* data: the Standardized Approach
(Based on 12% of Minimum Regulatory Capital)
*QIS: Quantitative Impact Study
Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,”
September

58. Pillar 1. Advanced Measurement Approach (AMA)
An internal operational risk system.
Not a standard approach yet.
Three broadly discussed approaches
Internal Measurement Approach (IMA)
Loss Distribution Approach (LDA)
Scorecard Approach (SA)
Operational Risk in BaselⅡ

59. Qualifying criteria and the relationship between approaches
Before adapting a new approach, you must fulfill some criteria.
Standardized
Approach
(SDA)
Advanced
Measurement
Approaches
(AMA)
Basic Indicator
(BIA)
Simple
Complex
Why do banks want to upgrade to “AMA” approach?
Operational Risk in BaselⅡ

60. Ans: Incentive- from 12% to 8%
75% of the level of BIA and SDA
IMA 75% x 12% =8%
Capital charge for operational risk:
-12%of MRC
Operational Risk in BaselⅡ

61. Internal Measurement Approach (IMA)
Banks estimate operational risk capital based on measures of expected operational risk losses.
IMA assumes a fixed and stable relationship between expected losses (the mean of the loss distribution) and unexpected losses (the tail of the loss distribution).
Operational Risk in BaselⅡ, AMA

62. Internal Measurement Approach (IMA)
Industry-Wide OpRisk Loss Distribution
E(L)
Expected
loss
U(L)
Unexpected
Losses
Probability
of loss γ
Section1
Section2
Section3
γ: a factor which translates
the expected loss (EL) into a capital charge.
Operational Risk in BaselⅡ, AMA

63. How to measure EL(expected loss)?
1. Joint Combination : business line / loss type combination
2. PE: The probability that an loss event occurs over some future horizon
3. LGE: The loss given that an event
4. EI: a proxy for the size (or amount of risk) of each business line’s operational risk exposure.
5. i : bank i
6. K : capital charge for OpRisk in each joint combination
Question : Is “γ” applicable for each bank ?
Operational Risk in BaselⅡ, AMA

64. Risk Profile Index (RPI)
-RPI captures the difference in the risk profile of an individual bank.
Industry Dustribution
-- RPI = 1.0
Case 1: fatter tale
-- RPI > 1.0
Case 1: less fat tale

65. Loss Distribution Approach (LDA)
Under LDA, banks estimate, for each business line/loss type combination, the likely distribution of operational risk losses over future horizon (for instance, one year).
The capital charge is based on the simple sum of the VaR for each business line (and loss type).
Operational Risk in BaselⅡ, AMA

66. Scorecard Approach (SA)
An initial level of operational risk capital at the firm or business line level
Modify these amounts over time on the basis of scorecards that attempt to capture the underlying risk profile and risk control environment of the various business lines.
SA can reflect improvements in the risk control environment that will reduce both the frequency and severity of future operational risk losses.
Operational Risk in BaselⅡ, AMA

67. The “floor”
The committee will limit the reduction in capital held when a bank moves from SDA approach to IMA approach by setting a floor, below which the required capital cannot fall.

68. Pillar 2 : Supervisory Review Process
Pillar 2 applies to all risks that a bank is facing.
Four principles :
Principal 1 : A bank should build systems to identify, measure, monitor and control its risks and maintain capital accordingly.
Principles 2-4 : supervisors should assess the internal capital adequacy assessments and strategies in place and require remedial actions where these are inadequate.
Operational Risk in BaselⅡ

69. Pillar 3. Disclosure Opposition to publication of operational data.
Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,”
September
Opposition to publication of operational data.
Operational Risk in BaselⅡ

70. I n d e x Part III Operational Risk Management In Practice
Part I The Introduction to Operational Risk
Part II Operational Risk in BaselⅡ
Part III Operational Risk Management In Practice

71. THE 10 PRINCIPLE
BIS published “Sound Practices for the Management and Supervision of Operational Risk” on February 2003
The document
Outlines a set of principles that provide a framework for the effective management and supervision of operational risk.
For use by banks and supervisory authorities when evaluating operational risk management policies and practices.

72. THE 10 PRINCIPLE Developing An Risk Management Environment
Principle 1: Operational risks is a distinct risk category that should be managed.
Principle 2: The bank’s operational risk management framework is subject to effective and comprehensive internal audit.
Principle 3:The framework should be consistently implemented throughout the whole banking organization

73. THE 10 PRINCIPLE Risk Management
Principle 4: Banks should identify and assess the operational risk inherent in all material products, activities, processes and systems.
Principle 5: Banks should implement a process to regularly monitor operational risk profiles and material exposures to losses.
Principle 6: Banks should have policies, processes and procedures to control and/or mitigate material operational risks.
Principle 7: Banks should have in place contingency and business continuity plans.

74. THE 10 PRINCIPLE Role of Supervisors
Principle 8: Banking supervisors should require that all banks have an effective risk management framework.
Principle 9:Supervisors should conduct regular evaluation of a bank’s operational risk management.

75. THE 10 PRINCIPLE Role of Disclosure
Principle 10: Banks should make sufficient public disclosure to allow market participants to assess their approach to operational risk management.

76. Rethink Operational Risk
Currently the industry seem to be working by
analogy to market risk and credit risk,but…
Market & credit risks:
Are accepted knowingly as part of the business decision.
Have a quantifiable size - Money lent,currency size, etc.
Have a reasonable amount of homogeneity
Have solid, long term historical data
Exhibit statistical properties that appear to be somewhat stable across time
Does operational risk exhibit any of these qualities?
Source:Credit Suisse Group Report

77. Rethink Operational Risk
Operational Risks exhibit numerous difficult
properties:
Risks implicitly accepted as part of being in business
Risks rarely chosen explicitly
Risks are diverse by nature
It’s an all other category
Is there a link between customer lawsuits, rogue traders and operations fails?
Risks are highly context dependent & change rapidly
Are your business, people or processing systems similar to 10 years ago?
Are the threats to those systems similar to 10 years ago?
How do you know when risks change (other than by judgment)
Is your estimate for Op Risk the same as pre 9/11?
Source:Credit Suisse Group Report

78. Rethink Operational Risk
Data Problem:
Source:Credit Suisse Group Report

79. Rethink Operational Risk
Control accidents can be separated into two types:
Individual, high frequency events can be better understood and controlled through more quantitative techniques
Relatively high frequency; can develop fairly robust statistics
Quantification and measurement can provide some valuable management tools
Organizational accidents are difficult events to understand and control
Occur infrequently & are hard to predict or foresee
Normally variety of contributing factors combine to cause the loss
Each has its own individual pattern of cause and effect
Source:Credit Suisse Group Report

80. Rethink Operational Risk
Operational Risk is a different animal and
has to be treated differently
Quantification Strategy
Prevention Strategy
Risk Mitigation Strategy

81. Quantification Strategy
Role for OpRisk Quantification
• Enables measurement of capital based on historical
experience of firm
• Improves bank decision making
• Provides a mechanism for better understanding “tail events,” those that may be outside a bank’s historical experience.
• Provides method for measuring the effect of risk mitigation tools.

82. Quantification Strategy
Example:From Risk Information to Risk Capital
Source:Allianz Report

83. Quantification Strategy
What (Loss describing) Data to collect?
Data Pool
Knowledge System
Source:Allianz Report

84. Quantification Strategy
Risk Map
Source:Allianz Report

85. Quantification Strategy
From single Risks to aggregated Risks and VaR
Source:Allianz Report

86. Quantification Strategy
Overall Distributions
Source:Allianz Report

87. Prevention Strategy Focus resources on shrinking those “holes”
Source:Credit Suisse Group Report

88. Prevention Strategy Integrating old and new tools is the key to
success
Internal control mechanism
Management Information System
Personnel education
Risk-aware corporate culture
External Audit
Etc…

89. Prevention Strategy 案例：理律破了哪些洞？ 未將新帝公司的轉匯戶頭，指定為在美國的新帝公司
未按月撰寫新帝公司對帳報告書，並藉此進行稽核
新帝公司的銀行存款戶與股票戶都交由劉偉杰管理
未確實做好移交工作
劉偉杰透過台北銀行等四家銀行，在八、九月進行鉅額轉匯時，相關金融機構都有向調查局洗錢防制中心通報。但因理律的高知名度與權威，調查局當時研判，「程序並無不法情事」
資料來源：工商時報 2003/10/27

90. Risk Mitigation Strategy
Purpose of Risk Mitigation
Reducing loss when accidents happen
Tools for Risk Mitigation
Securitizaion
Insurance
Business Continuity Plan

91. Risk Mitigation Strategy
Risk Securitizaion:example
In 1998 Toyota* entered into a relationship with Gramercy Place Insurance Ltd as the special purpose vehicle for this transaction.
Securitized a portion of Toyota’s auto lease residual risk for 1999,2000, and 2001 to protect against high losses on vehicles returned to Toyota at the end of full-term leases.
A deductible totaling up to the first 9% of residual value will be paid by Toyota on resulting losses. Losses that exceed the deductible are split 90% / 10% between investors and Toyota,respectively.
Notes issued in classes rated Aa2 / AA and Ba2/BB
Source:Goldman Sachs Report

92. Risk Mitigation Strategy
Comparison with Operational Risk
Source:Goldman Sachs Report

93. Risk Mitigation Strategy
Insurance seems to be the feasible tool
at this moment
Quantification techniques can provide firms with the framework to determine appropriate insurance coverage.
Related insurances include:
Directors & Officers Liability
Professional Liability
Assets Insurance
Etc…

94. Risk Mitigation Strategy
Insurance and Basel II
Reduced overall level of the operational risk capital charge partly to recognize the risk-mitigating effects of insurance.
If explicit recognition of “robust and comprehensive insurance” is permitted, it should be limited to AMA.
There should be a limit on the overall impact of insurance risk mitigation on the final capital amount.
Source :September 2001, Basel Committee on Banking Supervision, “Working Paper on the Regulatory Treatment of Operational Risk”

95. Risk Mitigation Strategy
Insurance for Operational Risk: Example
A number of shareholder class action suits are brought against a large commercial bank.Complaints assert that the bank engaged in numerous unlawful practices in order to increase profits, that the bank’s earnings had been overstated and were not prepared in accordance with GAAP, and that the bank failed to disclose a number of material events.
INSURANCE:Combined D&O, BPL, Pension Trust Liability, and Bond and Computer Crime policies.
SOLUTION:Combined suits were settled for $45 MM (excluding defense costs). The bank contributed the first $10 MM (policy deductible). Insurance paid the remaining $39MM.
Source:Marsh & McLennan Companies Report

96. Risk Mitigation Strategy
Business Continuity Plans
What is “BC Plan”?
Advance arrangements and procedures that enable an organization to respond to an event in such a manner that critical business functions continue with planned levels of interruption or essential change.
The importance of BC Plan:
According to Gartner Group survey, of the businesses that suffer a disaster and do not have a BC plan in place, 40% will fail within 18 months.

97. Risk Mitigation Strategy
The Six Steps To Effective BC Planning
perform a Business Impact Analysis (BIA)
regular practice runs should be carried out
at what point should the plan be invoked?
strict guidelines to follow after the invocation
Location, location, location
People element
Source :SunGard Availability Services Report

98. 資料來源：財政部金融局與中華民國銀行工會新巴塞爾資本協定共同工作小組第一階段研究報告
我國金融機構作業風險管理現況
資料來源：財政部金融局與中華民國銀行工會新巴塞爾資本協定共同工作小組第一階段研究報告
出版時間：民國九十二年六月
調查對象：52家本國銀行，但有2家因情況特殊予以免答。

99. 我國金融機構作業風險管理現況
對作業風險資本計提規定之了解程度

100. 我國金融機構作業風險管理現況
2006年底預計採用的資本計提方式

101. 我國金融機構作業風險管理現況
作業風險損失資料庫之建置規劃

102. 我國金融機構作業風險管理現況 國內銀行業界作業風險管理發展情形 問卷將發展情形分為以下5個階段
第一階段：作業風險管理仍相當粗糙，尚未設立專職單位
第二階段：開始意識到作業風險管理必須妥善管理，正逐步設立專 職單位並發展作業風險管理架構
第三階段：開始對作業風險之各項「質性」指標進行追蹤及評估
第四階段：開始發展作業風險管理量化模型
第五階段：將作業風險管理充分融入企業風險管理中，將作業風險衡量與信用風險、市場風險衡量加以整合

103. 我國金融機構作業風險管理現況
國內銀行業界作業風險管理發展情形

104. 我國金融機構作業風險管理現況
你 發 現 了 嗎!!

105. Operational Risk v.s. Our Career
5 個 孩 子 其 實 就 在 你 身邊 !!

106. Thank You for Your Attention!

107. Risk Mitigation Strategy
What is a lease residual?
Residual is the dollar amount that the bank guarantees your new car will be worth at the end of the lease as long as you stay within the terms of the lease. At the end of the lease this is also the amount you would pay for the car if you wanted to purchase it, plus tax, license, doc & any other applicable fees. The residual is set by the bank and is a percentage of MSRP regardless of what the actual purchase price is. Residual is not negotiable as the bank is guaranteeing the value and therefore they set it. If at the end of the lease, you have stayed within the terms of the lease, if the car is worth more than the residual, you might want to buy it, sell it or trade it in. If however at lease end the value is less than the residual, you can give it back to the bank and not be responsible for anything (As long as you have stayed within the terms of the lease).