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Risk In Financial Services > Chapter 3: Operational Risk > Flashcards

Chapter 3: Operational Risk Flashcards

1
Q

what is the definition of operational risk?

A

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

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2
Q

what does the definition of operational risk include exclude?

A

includes legal risk but doesn’t cover reputational risk

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3
Q

what are the crucial elements of an effective operational risk management framework according to the BIS?

A
  • clear risk oversight by management
  • strong operational risk culture
  • strong internal control culture
  • effective internal reporting
  • contingency planning
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4
Q

what are the 7 operational risk types provided by Basel?

A

Internal fraud
external fraud
Employment and workplace safety
Client, products and business practices
Damage to physical assets
Business disruptions and system failures
Execution and delivery management

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5
Q

what are AML provisions aimed at requiring firms to do?

A
  • Identify customers and report suspicious transactions
  • keep adequate records
  • report suspicious activity or behaviour
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6
Q

what are the set of appropriate risk management responses by firms?

A
  • educating staff on risks
  • putting systems and controls to mitigate risks
  • monitoring staff compliance
  • escalating behavioural exceptions
  • penalising contravention
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7
Q

what other risks can operational risk cause?

A

reputational, compliance, credit, market risks, liquidity, investment risks

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8
Q

what does a firm’s operational risk policy include?

A

defines a coherent, consistent approach to operational risk management, provides roadmap to move organisation to comprehensive firmwide methodology to risks

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9
Q

what does the operational risk framework involve?

A
  • defining appetite
  • defining methodology
  • assigning responsibility
  • establishing reporting and escalating mechanisms
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10
Q

what does a common operational policy and terminology existing globally allow?

A
  • balance between global standardisation and regional differences
  • sense of fairness
  • centralised control
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11
Q

what should the op. risk policy address to meet prime objectives?

A
  • identifying key officers
  • roles and responsibilities
  • segregation of duties
  • cross-functional involvement and agreement
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12
Q

what is the role of the op. risk management function?

A
  • work with managers to asses and quantify risks
  • provide a line for risk reporting
  • support and maintain op. risk system
  • benchmark good practice
  • risk oversight and monitoring
  • ensure issues are properly escalated
  • conduct qualitative op. risk analysis
  • conduct statistical modelling
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13
Q

what are the various methods used for the practical capture and identification of op. risk?

A
  • self assessment
  • key risk indicators
  • workshops
  • data analysis
  • external loss data
  • audit reviews
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14
Q

what are the key steps to stopping a risk materialising?

A
  • clear identification before the risk occurs
  • establishment of clear ownership of the risk
  • setting up and monitoring KRIs
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15
Q

what are the stages of the op. risk management framework?

A
  1. identification
  2. measurement and assessment
  3. monitoring
  4. reporting
  5. op. risk policy updates
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16
Q

what is the purpose of identifying and categorising risks?

A

helps firm to establish their risk profile and appetite for risk

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17
Q

what are the limitations of the self assessment method of identifying op. risks?

A
  • subjective
  • can be difficult
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18
Q

what are the main reasons for assessing and measuring op. risk?

A
  • establishing a quantitative baseline for improving the control environment
  • provide incentive for risk management
  • improve management decision-making
  • satisfy regulators and shareholders
  • make assessment of the financial risk exposure
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19
Q

what is the main difficulty of assessing and measuring op. risk?

A

lack of relevant and objective data

20
Q

what is the definition of risk measurement?

A

use of quantitative techniques to understand the size of a firms risk profile. includes statistical modelling and making predictions

21
Q

what does an impact and likelihood assessment do?

A

enables risks to be ranked in order of their severity, may be subjective or objective

22
Q

how is the overall risk rating score accumulated?

A

it is the product of the likelihood rating scores and impact rating scores (risk score= likelihood score x impact score)

23
Q

what are gross and net risk?

A

gross risk is risk that assumes there are no controls in place, net risk is risks with consideration of the control environment

24
Q

what are the advantages of an impact and likelihood assessment?

A
  • simple method
  • provides evaluation of effectiveness of control environment
  • focuses attention on the most important risks
  • uses minimal hard data
  • captures wide range of risk possibilities
  • encourages risk-aware culture and environment
25
Q

what are the disadvantages of an impact and likelihood assessment?

A

over-simplified and subjective

26
Q

what does scenario analysis use to capture scenario risks?

A

uses the experience of business professionals to capture possible scenarios that have occurred in the past, or may result in loss in the future

27
Q

what does the bottom-up approach seek to do?

A

analyse the individual risks and adequate controls across business processes. builds up a detailed profile of the risks that occur in each area.

28
Q

what are the advantages of a bottom up approach?

A
  • addresses risk and control issues at the process level
  • accountability and responsibility
  • encourages a more transparent risk culture
  • encourages continuous improvement
  • improved management information quality
29
Q

what are the disadvantages of a bottom up approach?

A
  • takes time to implement
  • can be subjectively influenced by managers
  • aggregating risks upwards t management is not straightforward
30
Q

How are KRIs identified?

A

top risks are identified and then data to describe the current status of those risks and then define the upper and lower limits on the data provides indicators on the firms key risks

31
Q

how can warning thresholds be established?

A

be defining limits of acceptability for each of the indicators

32
Q

what are the advantages of using KRIs?

A
  • allow trends to be monitored
  • allow limits of acceptability to be established
  • provides a basis for objective risk measurement
33
Q

what is the main disadvantage of using KRIs?

A

can cause skewed business performance

34
Q

how can historical loss data be used to measure op. risk?

A

once data has been collected, can be used in the measurement process, using benchmarking or statistical methods.

35
Q

what can a loss distribution curve be used for?

A

records the value of all material losses in a particular risk category over a time period. some prediction of future losses can be made within specified confidence limits

36
Q

what are some of the practical obstacles to implementing an operational risk management framework?

A

data collection restraints, cultural constraints, resource and cost constraints, indicator constraints (designing risk indicators that monitor the full range of risks)

37
Q

what is the risk register?

A

consists of a list of identified risks linked to the business objectives that would be threatened if the risks in the list were to materialise

38
Q

how are risks delegated in a risk register?

A

each risk is delegated to an owner or lead and then mitigating processes will be put in place

39
Q

how to controls allow op. risk mitigation?

A

ensures check points designed to detect errors and prevent fraud and theft

40
Q

what are preventative controls?

A

controls designed and in place to prevent risks from occuring in the first place by tackling the root cause

41
Q

what are detective controls?

A

controls designed to detect errors once they have occurred, QC checks fall under this category

42
Q

what does a BCP plan do?

A

business continuity plan, deals with premisis and people aspects to ensure the business can continue after a disaster

43
Q

what does disaster recovery do?

A

deals with IT and infrastructure required to keep the business running after a disaster

44
Q

what is outsourcing?

A

when the firm outsources some aspects of its business to a third party with specific expertise in managing certain risks

45
Q

what is physical security?

A

operational risks that arise out of physical notions e.g., new staff, external threats

46
Q

why is risk awareness training important?

A

should be given to staff to help them understand the principle of reducing the likelihood of risk occurring

47
Q

what is the relationship between firms and data protection?

A

firms are legally obliged to take the greatest care with data relating to their customers. customers must be able to give and retract consent on how data is used and stored

Risk In Financial Services (10 decks)

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