Realised internal operational risk loss events are a “backward-looking” measure of risk and so insurers are increasingly looking at complementing such measures with more “forward looking” measures of operational risk exposure, such as external loss data, Key Risk Indicators, control testing results and operational risk. Measuring operational risk. 1. MEASURING OPERATIONAL RISK CHAPTER 11; 2. Learning Objectives Operational Risk Data. Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational Risk is the residual risk not covered by other categories of risk, including insurance, financial, credit and liquidity risk.
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November 08, What are derivative instruments and what are they used for? November 08, Banks, institutional investors, issue of securities, measuring operational risk, markets operations, trading rooms, speculation and arbitrage November 05, More news Definition and issues The Basel Committee defines the operational risk as the "risk of loss resulting from inadequate or failed internal processes, people and systems or from external events".
This definition includes measuring operational risk error, fraud and malice, failures of information systems, problems related to personnel management, commercial disputes, accidents, fires, floods In other words, its scope seems so wide you do not immediately perceive the practical application.
The Operational Risk, as defined by the Basel committee
Moreover, the concept of operational risk appears at first glance not very innovative, since the banks did not wait for the Basel Committee to organise their activities in the form of procedures, and to develop internal audit departments to verify the correct application of these procedures.
However, spectacular failures, like Baring's, have attracted the attention of regulators on the need to provide banks with prevention and coverage mechanisms against operational risks through the allocation of dedicated measuring operational risk. The implementation advocated by an increasing number of studies on this subject is to consider as an actual operational risk: Proactive management of operational risk, in addition to allowing compliance with the requirements of the Basel Committee, necessarily leads to improved production conditions: In particular, such measuring operational risk approach allows the development of quantitative tools which define measurable objectives for operational teams in terms of reduction of operational risks.
Furthermore, the increasing complexity measuring operational risk sophistication of operations, the increased volumes and the real time capabilities mean that "failure is not an option", since the cost of the error can quickly amount to hundreds of thousands or even millions of Euros.
The general environment favors greater awareness of operational risk which becomes, just as credit risk and market risk management, measuring operational risk intrinsic component of banking activities.
The Operational Risk
The development of a method for monitoring operational risk, however, faces many internal obstacles, whether psychological or organisational: The staff is currently focused on other cross-market projects: The subject appears vague and not quantified, which makes it difficult to grasp. Several departments Secretariat, legal The reporting and monitoring tasks mean an extra burden for operational staff.
Finally, management itself may tend to minimise the impact measuring operational risk operational risks, as measuring operational risk always come with a "human error" side that may engage the liability of senior managers, all aspects they would prefer to ignore.
However the subject is gaining acceptance and the methodological body grows and takes shape gradually.
Risk map The first step in the process of monitoring operational risk is to establish a risk map. This map is based on measuring operational risk analysis of business processes, which we cross with the typology of operational risks.
A business process is a set of coordinated tasks, which aim at providing a product or service to customers. The definition of business processes primarily corresponds to a business-oriented analysis of the activity of the bank, and not to an organisational analysis.
Determining the business processes thus starts with the identification of the different products and services, then the actors who may belong to different entities within the measuring operational risk and the tasks involved in providing these products.
Then, to each step of the process, we assign the incidents likely to disrupt its unfolding measuring operational risk prevent the achievement of its objectives in terms of concrete results, or in terms of time.