Management of Operational Risk

Regulatory Capital Perspective Credit Risk – Basel I (1987) Market Risk – (Amendment 1998) Credit Risk – Basel II (2005) Operational Risk – Basel II (2005)

Regulatory Compliance Perspective Anti Money Laundering Undesirable Banking Practices Product Regulation Cross Border Business

Business Perspective Return on Capital Volatility Management Value Optimization

Risk Response Market response –Introduce new products Equity futures Foreign currency futures Currency swaps Options Regulatory response –Prudential norms –Stringent provisioning norms –Corporate governance norms

Internal Fraud Management Authorization of activities Reporting of transactions Measurement of bank positions –Regional level –National level –International level Property evaluation Regulatory compliance

Client Level Fraud Management Credit reports Monitoring worthless deposits Measures to scrutinize extortion Measures to scrutinize embezzlement Measures to scrutinize robbery Measures to scrutinize asset misappropriation

International Fraud Management Verify accounts transfer Verify accounts takeover Penalize non-compliance Penalize willful evasion Identify accounts with irregular movements

External Fraud Management Security to prevent robbery Expert personnel to detect forgery Systems security to prevent hacking Safety measures to ensure information safety

Employee Practices Adequate compensation Benefits meeting market practices Procedures in place for termination of employees Organized employee relations Employee health and safety rules Legal support

Business Process Management Enforce disclosure requirements (Know Your Customer (KYC)) Ensure privacy of business practices Avoid aggressive selling Proper usage of confidential information Legal provisions for lender liability

Customer Management Investigate customer transactions without violating customer confidentiality requirements. Scrutinize customer exposure limits. Ensure legal support for disputes in terms of advisory services of banks. Ensure error free development of banking products.

Systems Management Hardware maintenance contracts. Software updates and performance reports. Telecommunication performance. Ensure disruption free utility services. Proper communication to ensure error free loading of data. Ensure proper usage of operation models and systems

Enforcement Requirements Customer permissions Legal documentation Complete procedures Disclaimer clause where appropriate –Outsourcing –Customer dispute