Date post: | 10-Jul-2015 |
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Business |
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OPERATIONAL RISK UNDER BASEL II & III
Presentation by Eneni Oduwole
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Outline
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Evolution of Basel Guidelines
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Focus of the Basel II Framework
• Provide a standard for bank regulators to ascertain capital required by banks to guard against exposures to financial and operational risks thus promoting safety and soundness
• Maintain reasonable regulatory consistency for internationally active banks
• Protect the international financial system from insolvency, collapse and systemic risk by ensuring that risk taking is commensurate with the amount of capital held by banks as safeguard for insolvency
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Drivers of Basel II
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Refresher: What is Operational Risk (OpRisk)?
• ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’…Basel Definition
• It comprises 7 loss types, namely: Internal Fraud; External Fraud; Business Practices; System Failures; Execution & Delivery; Damage to Physical Assets; Employee Practices
• Losses are categorized as either Actual or Near-Misses (Potential and Prevented)
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
OpRisk Under Basel II
• Conduct of Risk Control Self Assessments (Discussed)
• Monitoring of Key Risk Indicators (Discussed)
• Collation of Loss Data (Discussed)
• Maintenance of Risk Registers (Discussed)
• Estimation of Economic Capital
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
OpRisk Capital Estimation Under Basel II
• Estimation of Economic Capital using any of these approaches that is suitable for the business model and maturity of the institution:
‒ Basic Indicator Approach (BIA)
‒ The Standardized Approach (TSA)
‒ Advanced Measurement Approach (AMA)
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Pillar 1 for OpRisk
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Measuring OpRisk Under Basel II
Business Line Internal Environment
Objective Setting
Event Identification
Risk Assessment
Risk Response
Control Activities
Info. & Comms.
Monitoring Overall
Corporate Finance
Trading & Sales
Commercial Banking
Payment & Settlements
Agency Services
Asset Management
Retail Brokerage
Governance Issues
General OpRisk Mgt
Overall Rating
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Pitfalls of Basel II
• Emphasis on regulatory compliance as against prudent business practices
• Reliance on data and risk measurement
• Focused mainly on Credit Risk Management
• Poor definition of risk tolerance levels and benchmarks for decision-making
• Incorrect risk aggregation stemming from weak risk correlations
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Focus of Basel III
• Increased capital requirements by raising the quality, consistency and transparency of an institution’s capital base
• Increased risk coverage for the trading book and complex transactions
• Introduction of leverage ratio as supplement for Basel II requirements
• Promoting stronger provisioning for future business activities
• Introduce liquidity coverage ratio and net stable funding ratio that would assure higher probabilities of solvency
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
OpRisk Challenge
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FBN CCPD, 2014 (ORGANIZED BY CIBN)
Way Forward for Effective OpRisk Mgt
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