Chapter 2 Flash Cards
What is the primary focus of governance in managing operational risk
The governance framework focuses on defining roles, responsibilities, and the structure for managing operational risk effectively within an organization
What are the key components of an operational risk governance framework?
Key components include the first, second, and third lines of defence, operational risk policy, risk culture, the ‘use test’, continuous review, and change management.
What role does the first line of defense play in operational risk management?
The first line of defense involves business units and operational functions managing risk directly, implementing controls, and ensuring risk-taking within defined limits
Describe the second line of defense’s role in operational risk management.
The second line includes risk management and compliance functions overseeing risk, developing policies, and advising the first line on risk matters
What is the third line of defense in managing operational risk?
The third line is internal audit, providing independent assurance on the effectiveness of risk management, controls, and governance processes
What is an operational risk policy?
It’s a formal document outlining the organization’s approach to managing operational risk, including strategies, processes, roles, and responsibilities.
How does risk culture influence operational risk management?
Risk culture refers to the norms and attitudes towards risk-taking and management within an organization, influencing how risks are identified, assessed, and mitigated.
What does the ‘use test’ entail in operational risk management?
It verifies that risk management tools and outputs are actively used in decision-making, risk assessments, and capital allocation processes
Why is continuous review and change important in operational risk management?
It ensures the risk management framework remains effective and relevant in light of changing internal and external environments.
What are the roles and responsibilities of the governing body in operational risk management?
The governing body oversees the entire operational risk framework, ensuring it aligns with strategic objectives and regulatory requirements.
How do external stakeholders impact operational risk management?
Stakeholders like regulators, investors, and customers have specific expectations and requirements that influence how operational risks are managed
What is the importance of clear roles and responsibilities in operational risk management?
Clear roles and responsibilities ensure accountability, effective risk management practices, and alignment with organizational objectives
Explain the significance of the risk governance framework’s interaction components.
These components facilitate coordination across the three lines of defense, ensuring comprehensive risk identification, assessment, and management
Describe the operational risk function’s roles and responsibilities
This function develops the operational risk framework, supports business units in risk management activities, and provides oversight and reporting
How does the operational risk management framework fit into the overall risk management strategy?
It integrates with the broader enterprise risk management (ERM) strategy, aligning operational risk practices with strategic risk management objectives.
Why is a robust risk culture critical for effective operational risk management?
A strong risk culture promotes risk awareness, encourages open communication about risks, and supports adherence to risk management practices.
How do continuous review and change processes contribute to operational risk management?
They ensure the operational risk framework adapts to new risks, regulatory changes, and evolving business strategies, maintaining its effectiveness.
What role do external stakeholders play in shaping operational risk management practices?
Their expectations and requirements drive the adoption of best practices, compliance with regulations, and transparency in risk reporting
How does the ‘use test’ enhance the operational risk management process?
By ensuring that risk assessment tools and data are actively used in making informed decisions, thereby integrating risk management into daily operations
What is the impact of regulatory requirements on operational risk management?
Regulations define minimum standards and practices for risk management, influencing the design and implementation of the operational risk framework.
How do internal audits contribute to operational risk management?
They provide an independent evaluation of the effectiveness of risk management practices and internal controls, identifying areas for improvement.
What is the significance of operational risk indicators in risk management?
Indicators help in monitoring and assessing the level of operational risk exposure, facilitating timely risk mitigation actions
How do changes in the business environment affect operational risk management?
Changes in the market, regulatory landscape, or internal processes may introduce new risks, requiring updates to the risk management framework
Why is stakeholder management important in operational risk management?
Understanding and managing stakeholder expectations helps in aligning risk management practices with external demands and compliance requirements.
How do operational risk assessments inform business decision-making?
They provide insights into potential risks associated with decisions, guiding risk-informed strategies and actions to mitigate adverse outcomes
What is the role of technology in managing operational risk?
Technology supports risk data collection, analysis, and reporting, enhancing the efficiency and accuracy of risk management activities.
How do training and awareness programs support operational risk management?
They enhance risk culture by educating employees on risk management practices, their roles in risk mitigation, and the importance of compliance
Explain the concept of risk appetite in operational risk management.
Risk appetite defines the amount and type of risk an organization is willing to accept to achieve its objectives, guiding risk-taking and management activities.
