Operational Risk

Operational Risk: Will We Ever Learn?
Presentation by:
Christopher J Pennington Chartered MCSI,
Senior Financial Trainer, Fitch Learning
June 2014
Agenda
Introduction
What is Operational Risk?
Why does a Laptop Cost $1.5mil?
What is Operational Risk Management?
What is the Key to Operational Risk Management?
Q&A
Prize Draw
Who Am I?
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2
Fitch Learning stands for
We pride ourselves on our innovation, our enthusiasm for developing and our
commitment to client service. You’ll find we’re the source of the intellectual
as well as the practical answers needed to succeed in a global market place.
INTELLIGENCE
INNOVATION
TRUST
People
Technology
Track record
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3
Since 2002 how many large financial
institutions have incurred operation
risk loses in excess of $100million?
A. Less than 50
61%
B. 50 to 75
C. 75 to 100
D. More than 100
25%
7%
A.
7%
B.
C.
D.
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4
In Numbers (2011)
• 36,258 reported losses greater than € 20,000
• Total value in excess of €24bil.
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
20-50
50-100
100-500
500-1,000 1,000-5,000 5,000-10,000
No. Losses Proportion of 36,258
10,000+
Value Proportion of €24bil
Source:2012 ORX Report on Operational Risk Loss Data
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Where’s the Focus?
Credit Risk
Market Risk
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What is Risk?
The Concise Oxford Dictionary
definition:
• ‘The chance or possibility of
damages, loss, injury or other
adverse consequence’
• Chance or possibility of
something happening in the
future
ONE
WAY
• Adverse consequence – the
potential outcome is thought of
as negative
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Operational Risk Definition
Basel / Bank of International Settlements (BIS) definition:
The risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events.
People
IT &
Systems
Process
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8
Which one of the following risk types is of
the greatest concern / relevance to you
and your organization today?
A. Regulations
20%
B. Political Interference
C. Macro-Economic
Environment
2%
43%
D. Technology Risk
E. Criminality
F. Human Resources
33%
0%2%
A.
B.
C.
D.
E.
F.
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9
Banking Banana Skins Report 2014
Global Rankings
Asia Pacific Rankings
1.
Regulations
1.
Macro-Economic Environment
2.
Political Interference
3.
Technology Risk
3.
Macro-Economic Environment
6.
Regulations
4.
Technology Risk
7.
Human Resources
9.
Criminality
12. Political Risk
23. Human Resources
?
Criminality
Source: CSFI/PcW Banking Banana Skins Report 2012
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Basel II Risk Categories
Risk Category
2011
Frequency
2011
2010
Gross Losses Gross Losses
Internal fraud
2.64%
1.32%
6.47%
External fraud
29.98%
7.33%
17.36%
19.01%
1.75%
4.10%
19.01%
64.72%
37.94%
1.59%
0.29%
0.49%
2.44%
4.73%
1.47%
34.92%
19.87%
32.16%
Employment practices and
workplace safety
Clients, products and
business practices
Damage to physical assets
Business disruption and
system failures
Execution, delivery and
process management
Source:2012 ORX Report on Operational Risk Loss Data
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11
How Does a Laptop Cost $1.5mil.?
Nationwide Building Society
• Security breaches
• A laptop stolen from employee’s
home
• Contained details of 11 million
customers
• Internal investigation three weeks
after the event
Fined
£980,000
(Aprox. $1.5mil.)
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12
Which one of the following risks is the
main one behind Nationwide’s $1.5mil.
laptop?
49%
A. People Risk
B. System Risk
C. Process Risk
D. External Risk
27%
22%
2%
A.
B.
C.
D.
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Operational Risk Management
Operational
risk policy
and appetite
Planning and
change
Risk reporting
and
escalation
Risk
identification/
classification
Risk
measurement
and
assessment
Risk
monitoring
Risk
mitigation
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14
Operational Risk Management
A. Is the responsibility of
Operational Risk
Management
93%
B. Doesn’t impact me so long
as I do my job properly
and diligently
C. Is my responsibility
D. What’s Operational Risk
Management?
2%
A.
4%
B.
0%
C.
D.
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Operational Risk Management
Risk reporting
and
escalation
Risk
identification/
classification
Risk
monitoring
Risk
mitigation
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The Key to Operational Risk
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3 Things That You Can Do…
“The only thing we have to fear is...fear itself — nameless,
unreasoning, unjustified terror which paralyzes needed
efforts to convert retreat into advance.”
Franklin D. Roosevelt 1933
1. Establish a common language and understanding of what
operational risk means to you, your team and your firm.
2. Controls are there for a reason – use them
If you aren’t using them, ask why?
3. Think about your own role, what one thing can you do?
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18
Thank you
Questions?
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19
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20
Asia-Pacific
Europe
Middle East & Africa
North America

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