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

Chapter 3: Operational Risk Flashcards

1
Q

What is 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 elements are essential for effective operational risk management framework

A

Clear risk oversight by board and SM
Strong operational risk culture
Strong Internal control culture
Effective internal reporting
Contingency planning

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3
Q

What are the seven operational risk types

A

Internal fraud
External fraud
Employment practices and workplace safety
Clients, products and business practices
Damage to physical assets
Business disruption and system failures
Execution, delivery and process management

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4
Q

Examples of market abuse

A

Insider dealing
Improper disclosure
Improper dissemination

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5
Q

What are the three stages of money laundering

A

Placement
Layering
Integration

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6
Q

What are the Anti-money laundering provisions

A

Identify customers and report suspicious transactions at the placement and layering stages
Keep adequate records which should prevent the integration stage being reached
Report suspicious activity or behavior to the relevant regulatory or legislative authority

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7
Q

What are some risk management precautions in place to prevent financial crime

A

Educating staff
Putting systems and controls in place to mitigate the risk of occurrence
Monitoring staff compliance with the internal rules and the external legal and regulatory stipulations
Escalating behavioral exceptions to a specific individual or committee for investigation
Penalizing contravention with the rules and if necessary informing the relevant authorities

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8
Q

Operational risk’s consequential effects

A

Reputational risk
Compliance risk
Credit risk
Market risk
Liquidity risk
Investment risk

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9
Q

What is an operational risk policy

A

A document which outlines a firms strategy and objectives for operational risk management

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10
Q

What is included in an operational risk policy

A

Identify key officers
Roles and responsibilities
Segregation of duties
Cross-functional involvement and agreement

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11
Q

Roles of operational risk management function

A

Assess risks
Benchmark good practice
Support and maintain
Provide oversight
Ensure issues are escalated
Statistical modelling

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12
Q

How to identify operational risk

A

Self assessment
Key risk indicators (KRIs)
Risk workshops
Loss data trend analysis
External loss data
Audit reviews

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13
Q

How to prevent a risk from materializing

A

Identify risk before it occurs
Establish clear ownership of the risk
Monitor appropriate risk indicators

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14
Q

How to reduce impact of materialized risk

A

Quick escalation
Assign an owner
Ensure appropriate insurance is in place

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15
Q

What is included in an operational risk management framework

A

Risk identification
Risk measurement and assessment
Risk monitoring
Risk Reporting
Operational risk policy

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16
Q

Why is categorizing risks beneficial

A

More succinct risk management
Better understanding of weaknesses
Common language for discussing risks

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17
Q

What is self assessment risk identification

A

Typically involves a checklist of the risk that a particular area of the firm faces. Risks are scored on probability and impact

18
Q

Why does self assessment have limitations

A

It is subjective and therefore subject to manipulation
Combining scores from different participants can be difficult

19
Q

reasons for measuring and assessing operational risk

A

Establish quantitative baseline from improving control environment
Provide incentive
Improve management decision making
Satisfy regulators and shareholders
Make an assessment if the financial risk exposure

20
Q

What is risk measurement

A

The use of quantitative techniques to understand the size of a firm’s or business area’s risk profile

21
Q

What is risk assessment

A

Utilizes objective data and uses human judgement to estimate the impact on the business

22
Q

What is an impact and likelihood assessment

A

The assessment may be subjective or objective. The risk severity ranking depends on the likelihood of the risk being realized and the impact

23
Q

What is an example of likelihood probability ratings

A

1 = very low - not likely to occur within 10 years
2 = low - Likely to occur within 3 to 10 years
3 = medium - Likely to occur within 3 years
4 = High - Likely to occur within a year

24
Q

What is an example of impact loss ratings

A

1 = Very low - under £1000
2 = low - £1000 to £10,000
3 = Medium - £10,000 to £50,000
4 - High - Above £50,000

25
Q

How to calculate risk score

A

Likelihood score*Impact score

26
Q

Advantages of impact and likelihood assessment

A

Simple
Evaluates control environment
Focuses attention on most important risks

27
Q

Disadvantages of impact and likelihood assessment

A

Over simplified
Subjective

28
Q

What is scenario analysis

A

A top down method of highlighting potential risk combinations in order to allow preventative action to be taken

29
Q

What is bottom up analysis

A

Bottom up measurement seeks to analyze the individual risks and adequacy of controls across business processes.

30
Q

Advantages of bottom up analysis

A

Addresses risk issues at process level
Clearly defines responsibility
Encourages better risk culture
Can improve quality of management information

31
Q

Disadvantages of bottom up analysis

A

Takes time to implement
can be subjective
Not always straight forward

32
Q

Advantages of using KRIs

A

They allow trends to be monitored and can be used to anticipate problems
Allow for limits of acceptability
Provide a basis for objective risk management

33
Q

Disadvantage of KPIS

A

Can cause skewed business performance if managers start managing to their KRIs

34
Q

What are expected losses

A

errors that occur with reasonable frequency. They represent known process weaknesses which may be too expensive to fix. These errors are paid for through a pre-provided budget

35
Q

What are unexpected losses

A

Low frequency, high impact events that can create serious problems

36
Q

What are the practical constraints in risk management

A

Data collection constraints
Cultural constraints
Resource and cost constraints
Indicator constraints

37
Q

What is a BCP

A

A business continuity plan deals with the premises and people aspects of a disaster e.g., where will staff work if main site is out of action

38
Q

What is DR

A

Disaster recovery procedures deal with the IT and other infrastructure required to keep the business running

39
Q

What is a CMT

A

Crisis management team

40
Q

what can historical loss data be used for

A

Escalation thresholds
Loss casual analysis

Risk In Financial Services (7 decks)

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