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Management issues in online Management issues in online BankingBanking

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An Introduction to Risk ManagementAn Introduction to Risk Management

Risk Management Risk Management is the process of is the process of measuring or assessing the actual or measuring or assessing the actual or potential dangers of a particular potential dangers of a particular situation.situation.

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Growth in Number of National Banks that Growth in Number of National Banks that Have Transactional WebsitesHave Transactional Websites

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Technology-based BankingTechnology-based BankingProducts & ServicesProducts & Services

Balance inquiryBalance inquiry Transaction informationTransaction information Funds transferFunds transfer Cash ManagementCash Management Bill paymentBill payment Bill presentment Bill presentment Loan applicationsLoan applications Stored ValueStored Value

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Technology-based BankingTechnology-based BankingProducts & ServicesProducts & Services

AggregationAggregation Electronic FinderElectronic Finder Automated clearinghouse (ACH) transactionsAutomated clearinghouse (ACH) transactions Internet PaymentsInternet Payments Wireless BankingWireless Banking Certification AuthorityCertification Authority Data StorageData Storage

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Risk Has Two ComponentsRisk Has Two Components Uncertainty.Uncertainty.

Exposure.Exposure.

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Types of RiskTypes of Risk Operational.Operational.

Credit.Credit.

Reputational.Reputational.

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Operational RiskOperational Risk

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

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Operational Risks IncludeOperational Risks Include Internal Fraud.Internal Fraud. External Fraud.External Fraud. Employment Practices and Workplace Safety.Employment Practices and Workplace Safety. Clients, Products and Business Practices.Clients, Products and Business Practices. Damage to Physical Assets.Damage to Physical Assets. Business Disruption and System Failures.Business Disruption and System Failures. Execution, Delivery and Process Management.Execution, Delivery and Process Management.

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Internal FraudInternal Fraud Unauthorized Activity.Unauthorized Activity.

Transactions not reported.Transactions not reported. Transaction type unauthorized.Transaction type unauthorized. Mismarking of position.Mismarking of position.

Theft and Fraud.Theft and Fraud. Fraud/credit fraud/worthless deposits.Fraud/credit fraud/worthless deposits. Theft/extortion/embezzlement/robbery.Theft/extortion/embezzlement/robbery. Misappropriation of assets.Misappropriation of assets. Forgery.Forgery. Account take-over/impersonation.Account take-over/impersonation. Bribes/kickbacks.Bribes/kickbacks. Insider trading.Insider trading. Money laundering.Money laundering. Willful blindness.Willful blindness.

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External FraudExternal Fraud Theft and Fraud.Theft and Fraud.

Theft/robbery.Theft/robbery. Forgery.Forgery. Check kiting.Check kiting. Identity theft.Identity theft. Elder financial abuse.Elder financial abuse.

Systems Security.Systems Security. Hacking damage.Hacking damage. Theft of information (with monetary loss).Theft of information (with monetary loss).

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Business Disruption and System FailuresBusiness Disruption and System Failures Systems.Systems.

Hardware.Hardware. Software.Software. Telecommunications.Telecommunications. Utility outage/disruptions.Utility outage/disruptions.

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Credit RiskCredit Risk

Risk due to an uncertainty in a Risk due to an uncertainty in a counterparty’s ability to meet its counterparty’s ability to meet its obligations in accordance with agreed obligations in accordance with agreed upon terms.upon terms.

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Credit Risks Include:Credit Risks Include: Loans.Loans. Acceptances.Acceptances. Interbank transactions.Interbank transactions. Trade financing.Trade financing. FX transactions.FX transactions. Futures.Futures. Swaps.Swaps. Equities.Equities. Letters of credit.Letters of credit. Options.Options.

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Sound Practices for Managing Sound Practices for Managing Credit RiskCredit Risk

Establish an appropriate credit risk environment.Establish an appropriate credit risk environment.

Operate under a sound credit-granting process.Operate under a sound credit-granting process.

Maintain an appropriate credit administration, Maintain an appropriate credit administration, measurement and monitoring process.measurement and monitoring process.

Ensure adequate controls over credit risk.Ensure adequate controls over credit risk.

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Establish an Appropriate Credit Risk Establish an Appropriate Credit Risk EnvironmentEnvironment

Board of Directors should review credit risk strategy Board of Directors should review credit risk strategy periodically.periodically.

Senior management should implement credit risk Senior management should implement credit risk strategy approved by the Board.strategy approved by the Board.

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Reputational RiskReputational Risk

Reputational risk is the potential that Reputational risk is the potential that negative publicity, whether true or not, will negative publicity, whether true or not, will result in loss of customers, severing of result in loss of customers, severing of corporate affiliations, decrease in corporate affiliations, decrease in revenues and increase in costs.revenues and increase in costs.

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Reputational RiskReputational Risk This is the current and prospective risk to earnings

and capital arising from negative public opinion. A bank's reputation can be damaged by Internet banking services that are poorly executed (e.g., limited availability, buggy software, poor response).

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Benefits of Effective Reputation Benefits of Effective Reputation ManagementManagement

Improving relations with shareholders.Improving relations with shareholders.

Creating a more favorable environment for Creating a more favorable environment for investment.investment.

Recruiting/retaining the best employees.Recruiting/retaining the best employees.

Reducing barriers to development in new markets.Reducing barriers to development in new markets.

Securing premium prices for products.Securing premium prices for products.

Minimizing threats of litigation.Minimizing threats of litigation.

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Reputational Risk ChecklistReputational Risk Checklist Processes for crisis management are planned and Processes for crisis management are planned and

documented.documented. External perceptions of the bank are regularly measured.External perceptions of the bank are regularly measured. Reputational threats are systematically tracked.Reputational threats are systematically tracked. Employees are trained to identify and manage reputational Employees are trained to identify and manage reputational

risks.risks. Standards on environmental, human rights and labor Standards on environmental, human rights and labor

practices are set publically.practices are set publically. Relationships and trust with pressure groups and other Relationships and trust with pressure groups and other

potential critics are established.potential critics are established.

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QuestionsQuestions

Write a brief note on management issues on online Write a brief note on management issues on online banking??banking??