Risk ManagementUniversity of Economics, Kraków, 2012

Tomasz Aleksandrowicz

operational risk management

credit risk definitioncredit bureau and rating agencies

credit risk management

operational risk

• risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

• operational risk is much harder to identify than market and credit risk

people risk

• Employee collusion/fraud • Employee error • Employee misdeed • Employers liability • Employment law

process risk

– Transaction Risk– Documentation/contract risk.– Operational Control Risk– Model Risk

technology risk

external risk

causes of operational risk

• Internal fraud • External fraud• Employment practices and workplace safety• Clients, products and business practices. • Damage to physical assets. • Business disruption and system failures • Execution, delivery and process management

3 approaches in banking

key risk indicators

basic indicator approach

• simplest operational risk measurement method• banks has to hold capital reserves for operational loss• average income gross income from previous 3 years times

given percentage (alpha)• years with negative or zero income excluded• committee alpha percentage – 15% (represents industry

average operational risk)

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Standardized Approach

• more complex method of operational risk measurement• banks has to hold capital reserves for operational loss• three-year average across each of the business lines in each

year times given percentage (beta)

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standardized Approach – beta factor

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advanced measurement approach (AMA)

• comprehensive method based on bank’s internal operational risk measurement system

• quantitative and qualitative criteria• subject of regulatory approval• bank must be able to demonstrate that its approach captures

even unlikely events• minimum five-year observation period of internal loss data• external data could be used• high-severity events must be subject of scenario analysis and

use external data and expert advisory15