12. Operational Risk

Question 1

What is operational risk and which two sub- areas compose it?

Answer 1

Risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.
Includes people risk, tech, physical, legal.
+ Cyber risk: due tu digitalization
+ Compliance risk (risk of not following laws)

Question 2

How can you relate Basel II and Operational Risk?

Answer 2

In Basel II there is a capital charge for Operational Risk
Three alternatives:
* Basic Indicator (15% of annual gross income)
* Standardized (different percentage for each business line)
* Advanced Measurement Approach (AMA)

Question 3

Describe AMA approach:

Answer 3

• Doesn’t take into consideration margin and profit. Considers category and buisness lines.
• Elements
  + Internal Data
  + External Data (formula)
  +Scenario analysis
  + Buisness enviroment and internal control factors (complexity of buisness, tech used, pace of change, level of supervision, Staff turnover rates)

Question 4

Proactive approachs?

Answer 4

+ Allocate operational risk capital to encourage business units to reduce operational risk
+ Educate employees to be careful about what they write in emails
+ KRI: Customer complaints can become loss so it’s important to manage them. It’s better to call the customer and say sorry and retain the customer rather than waiting for customer’s aggressiveness.
+ RCSA