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BANKING & OPERATIONAL RISK Naeem Iqbal – Team Leader Commercial Banking Habib Bank Limited.

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Presentation on theme: "BANKING & OPERATIONAL RISK Naeem Iqbal – Team Leader Commercial Banking Habib Bank Limited."— Presentation transcript:

1 BANKING & OPERATIONAL RISK Naeem Iqbal – Team Leader Commercial Banking Habib Bank Limited

2 Operational Risk  Operational Risk is defined as the risk of loss resulting from inadequate or failed processes, people, and systems or from external events. The definition includes legal risk, which is the risk of loss resulting from failure to comply with laws as well as prudent ethical standards and contractual obligations. It also includes exposure to litigation from all aspects of institutions activities.

3 Example  Technology failure business premises becoming unavailable inadequate document retention or record-keeping poor management, lack of supervision, accountability and control errors in financial models and reports attempts to conceal losses or make personal gains (rogue trading) third party fraud

4 How Banks Secure Operational Risk  Perfection of an interest in collateral: A claim is perfected if it is senior to any existing or future third-party claims in the event of bankruptcy. A perfected interest represents a lien on collateral. Requirements to perfect a claim can be complex and vary by both jurisdiction and the nature of the collateral.collateralsenior

5 Bankruptcy  When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7.debt  A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed almost immediately, with broad powers to examine the business's financial affairs.  The Trustee generally sells all the assets and distributes the proceeds to the creditors. This may or may not mean that all employees will lose their jobs. When a very large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.Trusteeemployeesjobs  Fully secured creditors, such as collateralized bondholders or mortgage lenders, have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right which cannot be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.creditorscollateralizedbondholders

6 Facts of Operational Risk  72% of the incidents were handled internally without any legal action or law enforcement.  29% of these incidents could not identify a subject responsible for committing a crime.  35% of these incidents could not proceed due to a lack of evidence.

7 Reason  The incident was exposed to the public as a result of the magnitude or harm that was caused by the incident. The organization was prepared to capture evidence, properly investigate the incident and pursue a recovery of the loss either in a civil or criminal process of law  The organization may be lazy or apathetic to these loss events or may have an insurance policy that covers these types of losses and was able to successfully recover the almost $400, incident average through this process

8 SwissAir  The “Flying Bank” ends up buried  The former national airline of Switzerland, Swissair, used to be so financially stable that it was known as the “Flying Bank.” Founded in 1931, Swissair epitomized international transportation until the late 1990s, when the airline’s board decided to follow an aggressive borrowing and acquisition policy called the Hunter strategy. Then, the terrorist attacks of September 11, 2001 put a void in the company’s plans Swissair found itself hamstrung with debt. Unlike some other airlines, however, Swissair couldn’t handle the financial hit. Mismanagement and bad ideas—trundling large sums of cash to purchase fuel at foreign airports, for example—left the airline gasping for oxygen. In 2002, Switzerland was embarrassed to lose its national icon for good.former national airline  Main Error Aggressive borrowing September 11,2001 Purchase Fuel in Cash from Foreign Airport Mismanagement

9 Commodore Computers You can’t kill the C -64  Between , Apple, IBM, and Atari computer were quaking in their boots. The reason?  The Commodore 64 was selling 2 million units a year and dominated nearly 50% of the total market.Commodore 64  As the company tried to innovate by releasing the Commodore plus/4, a faster, smarter version with a color screen, they alienated their original customer base.  The new model was incompatible with the cherished C64. Commodore tried to discontinue the old line in the US by 1990 and announced it would stop shipping them in The tactic didn’t work. Customers all over Europe continued to snap up the C64s until it became impossible for the company to manufacture them at a reasonable price without selling new, more expensive models. As they say, “you can’t kill the C64.” The company went bankrupt in the spring 1994.

10 GM’s Robot Mania  CEO Smith: was fascinated with technology. Among other projects, such as the purchase of IT firm EDS Cash loss not in production, Smith embarked on a very aggressive effort to implement robots in GM factories.   When Smith was appointed, GM had approximately 300 robots of one kind of another. He soon created a jointventure with Japan’s robot designer Fujitsu-Fanuc, and said he planned to deploy 14,000 new robots in GM plants  As one GM finance executive later noted, at the time the company could have bought both Toyota and Nissan for the money invested in the failed robot technology

11 GM’s Bad Move  Costing billions of dollars, the robots never really worked. As one observer wrote, “The robots accidentally painted themselves and dropped windshields on to front seats.”  A “show place” factory in Hamtranck, MI turned out to be more like a “basket case.” Introduction of the robots lowered productivity. A nearby Mazda plant produced just as many vehicles, with 1,500 fewer employees.The entire project was later largely scrapped, as GM’s costs rose and market  share shrunk. Meanwhile, Toyota delivered low cost, high quality vehicles using comparatively low tech “lean production” techniques


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