Chapter 5: Operational Risk Management Flashcards
What is the definition and purpose of incident data collection?
The process of gathering detailed information on incidents that may pose risks. Essential for risk identification, compliance, and business performance improvement.
What are the methods of data collection for incident data?
- Automated Systems: Software logs incidents in real-time.
- Manual Reporting: Employees report incidents via structured forms and channels.
- Audits & Reviews: Regular reviews ensure incident accuracy.
- Existing Sources: Data from the general ledger, IT logs, legal cases, customer complaints.
What are the benefits of comprehensive data collection?
- Trend Analysis: Identifies risk patterns over time.
- Risk Assessment: Uses historical data for better evaluation.
- Regulatory Compliance: Meets incident reporting requirements.
- Continuous Improvement: Enhances risk management strategies.
Why is understanding losses in operational risk essential?
Essential for identifying weaknesses in controls and helps meet regulatory requirements (Basel regulations).
What is the regulatory impact of loss data according to Basel regulations?
- Basel Regulations (AMA & SMA): Losses drive capital requirements; higher losses = higher capital charges.
- Pillar 2 Compliance: High-quality loss data can reduce capital add-ons.
- BCBS Data Requirements: Maintain a 10-year history of data, record losses above €20,000, use event-type mapping for classification, ensure independent review for accuracy.
What types of losses and incidents are recognized in operational risk?
- Direct Losses: Immediate financial impact (e.g., client compensation, fines).
- Indirect Losses: Consequences such as reputation damage, customer loss, increased compliance costs.
- Near Misses: Incidents avoided by luck, not proper controls (often underestimated).
List the key components of the incident data collection process.
- Reporting: Clear and accessible systems for incident submission.
- Recording: Standardized forms ensure consistency.
- Reviewing: Regular checks to validate data accuracy.
- Analyzing: Detect trends and root causes.
- Reporting: Inform management and regulators.
What are Key Risk Indicators (KRIs)?
KRIs are metrics used to monitor risk exposure and control effectiveness.
What are the categories of Key Risk Indicators (KRIs)?
- Exposure Indicators: Measure changes in risk exposure (e.g., market volatility).
- Stress Indicators: Highlight resource strains (e.g., staff workload).
- Failure Indicators: Indicate weak controls (e.g., transaction errors).
- Causal Indicators: Track underlying risk drivers (e.g., financial pressure & fraud).
What are the roles of Key Risk Indicators (KRIs)?
- Monitor risk-taking behavior.
- Track changes in likelihood and impact of risk events.
- Provide assurance to the board that risks are managed.
Differentiate between leading and lagging KRIs.
- Leading KRIs: Identify risk drivers before incidents occur.
- Lagging KRIs: Identify past risk events to improve controls.
What are the features of strong Key Risk Indicators (KRIs)?
- Early Warning: Detect risk trends before they escalate.
- Business-Relevant: Tailored to company operations.
- Data-Driven: Based on historical and real-time data.
- Actionable: Aligned with risk appetite.
- Owned by Business Units: Ensures accountability.
What is the purpose of risk reporting?
Risk reporting communicates risk exposure and control effectiveness to stakeholders.
What are the golden rules of reporting?
- Value must exceed cost – Reporting should be efficient.
- Clear purpose – Reports should serve a decision-making need.
- Influence decision-making – Reports should provide actionable insights.
What typical content can be found in risk reports?
- Incident Reports: Number, severity, and frequency of events.
- Top Risks: Summary of the most significant risks.
- KRIs & Issue Monitoring: Dashboard-based reports with trend analysis.
- Action Plans & Follow-ups: Tracking risk mitigation strategies.
What challenges are associated with risk reporting?
- Balancing Detail: Avoid too much or too little information.
- Filtering & Aggregation: Ensure data is meaningful at different management levels.
- Engagement: Reports must remain useful and relevant.
What are best practices in risk reporting?
- Use a clear risk taxonomy – Classify risks properly.
- Focus on control effectiveness – Not just risk events.
- Escalate critical risks unaltered – But summarize minor details.
- Separate Monitoring from Reporting: Risk Monitoring = Operational tracking of controls; Risk Reporting = Escalation of key risks to management.
What are the challenges in using KRIs and risk reporting?
- Data Availability: Ensuring timely and accurate collection.
- Threshold Setting: Establishing meaningful and actionable limits.
- Integration with Other Risk Management Tools: KRIs must align with overall risk strategies.
- Continuous Improvement: Regularly updating KRIs as risks evolve.
What future trends are expected in operational risk and KRIs?
- Advanced Analytics: AI & big data for better risk detection.
- Real-Time Monitoring: Instant risk updates for better decision-making.
- Integrated ERM Systems: Seamless connection of risk functions.
- Enhanced Visualization: Improved dashboards for clearer insights.
Fill in the blank: Incident data collection is crucial for _______.
[reporting and regulatory compliance]
Fill in the blank: Loss reporting impacts _______ capital.
[regulatory]
True or False: KRIs are not relevant for regulatory compliance.
False
What should you focus on regarding risk reporting for exam preparation?
Focus on report structure, challenges, and aggregation methods.
What future trends should you be aware of for exam preparation?
Be aware of AI, automation, and real-time reporting.
