Operations Risk Management and Mitigation - from Assessment to Implementation

Registration Process: 8:30 AM – 9:00 AM

Session Start Time: 9:00 AM

THE WHY, HOW & WHAT OF OPERATIONAL RISK

What is risk?
• Operational Risk – The big picture
• A short history of risk
• Dimension & drivers of risk management
• Business drivers
• Regulatory drivers
• Rating Agencies & risk
• Cross-border implications
• What is the value of Operational Risk Management?

Risk Types
• How we categorize risks
• What is covered under Basel II?
• Risk categories
• Basel’s risk coverage
• Operational risk categorization
• The financial risk management environment
• The operational risk management environment
• The technical Implications of operations risk management

Risk & Capital - An Introduction to Basel I, II and III
• What is capital?
• Capital in financial institutions
• The BIS capital standards
• Basel’s three pillars
• Basle’s operational risk options
• Implementation considerations
• Implementation of Basel
• The Pillar II maze
• Implementation issues

Managing Operations Risk
• The governance process
• Setting risk management objectives
• Building a risk culture
• Examples of a staff risk culture
• Examples of management risk culture
• Why are risk cultures important?
• Compliance requirements
• Operational risk – definition and examples
• Enterprise Risk Management
• Key elements in managing operations risk
• A selection of case studies to illustrate the material covered
• The banking activity framework - the “Top-Down” approach of the BIS
• Main areas affected by operational risk
• Key Risk Factors

Operational Risk –Practical Examples
• Participants are led through a series of operational risk failures in recent years aimed a illustrating the wide variety of operational risks that can be encountered.
• Case Study: We take detailed look at the 2007, US$ 7.2 billion loss at SocGen, its causes, the key warning signals that were overlooked, and the consequences for the financial industry.

Key Elements in Managing Operational Risk
• The core issues in managing operational risk
• Risk Analysis
• Determining the “Risk Appetite”
• Risk impact/ Event frequency
• Impact vs. Probability
• A generic case study

Operational Risk Financing
• Risk financing
• Optimizing risk & reward
• The cost of risk
• The operational risk financing program
• Operational risk financing mechanisms
• How financing methods are applied

Methods & Models
• Measurement methods
• The Loss Modeling Method
• Monte Carlo simulations
• Operational risk & bank strategy
• Quantitative & Qualitative approaches
• Key Risk Indicators (KRIs)
• Operational risk & the business cycle
• Problems in identifying operational risks

COSO ERM Framework
• COSO - an integrated risk management framework
• The COSO framework
• Codification of the 17 COSO Principles

The Black Swan
• The challenges of outlier events for contingency planners
• Understanding a “Black Swan” event and its principal characteristics.
• We examine the nature of a Black Swan event
• Challenges for Planners, Strategists and CEOs.
• How can you mitigate a Black Swan event?
• Case Study: Can recent outlier events, like the eruption of Iceland’s Eyjafjallajökull volcano, the Deepwater Horizon catastrophe and the Japanese Tsunami be seen as black swan events? Gain a deeper insight into some of the subtleties of operational risk in the real world.

Operations Risk & Basel (II and III)
• The BIS definition of operational risk
• BIS standards for managing operational risk
• Basic Indicator Approach (BIA)
• Business Lines Approach
• Advanced Measurement Approaches (AMA)
• Loss event types
• Criteria for the Advanced Measurement Approach

All Basel material is current and up-to-date in terms of current BIS developments

Managing Operations Risk under Basel - A “Hands-on” approach
• Basel Standards
• Basel’s’ three approaches

"Sound Practices for the Management and Supervision of Operational Risk"
• Principles for the management of operational risk
• Sound operational risk governance
• Each of the 11 Principles are examined in terms of their content, meaning and implementation factors
• Responsibilities

Developing an appropriate Risk Management Environment
• Policy & structure
• Developing an appropriate risk management environment
• Implementation
• Mapping risks to controls
• Understanding risks, goals and priorities
• Prioritizing risk based on probability & impact
• Establishing responsibilities for risk management
• Mapping risk strategies to categories of control
• Designing & Documenting specific controls
• Implementing risk management controls

Defining the Categories of Operational Risks

We examine the BIS categories of operation risk in terms of specific examples. The categories covered are:

• Internal Fraud
• External Fraud
• Employment Practices and Workplace Safety
• Clients, Products & Business Practices
• Damage to Physical Assets
• Execution, Delivery & Process Management
• Business Disruption & System Failures

Products & Operations Risk
• Case Study: The US Sub-Prime Mortgage Crisis
• The 2008 Global financial crisis was triggered by the Sub-Prime Mortgage problem in the United States. This case study clearly illustrates how insufficient or total lack of attention to Operations Risk in the detail and stress testing of the Mortgage Product, its various derivatives as well as the processes and operations led to financial meltdown in the US and its contagion across the globe.

MANAGING OPERATIONS RISK – TOOLS & TECHNIQUES
Causes & Consequences – The Bow Tie
• The math of operational risk management
• Causes & consequences of loss events and what they tell us
• The Bow Tie Diagram – building and using this method to create effective operational risk management controls

Methods for Assessing Operational Risks
• Four basic assessment methods
• Loss data collection (internal & external)
• Using loss data
• Internal data
• External data
• Scenario analysis
• Using scenarios
• Tabletop/ Desktop exercises
• Making tabletop exercise effective
• Why exercise? Why use scenarios?
• Statistical techniques
• Desktop Exercise: Scenarios form the basis for a desktop exercise in which participants use and develop their newfound operational risk management skills to work through the simulation of a real risk event.

A Risk Assessment Model
• The process
• Environmental survey
• Technology inventory
• Identifying & assessing the operational risks (including an illustrative operations risk management plan)
• Minimum control requirements
• Risk identification tools

Current Operations Risk Management Themes in Banking

New technologies and practices are changing the nature of bank operational risk in many dramatic ways. In this section we explore a selection of current “risk themes” and get to grips with how the operations risk profile is changing in the constant struggle between profit and prudence.

This is a fast changing area and this section of the course is being constantly updated.

Closing CASE STUDY
• Kweku Adoboli – from rising star to rogue trader

This case study on a recent event provides an in-depth examination of operational risk management failures resulted in substantial losses to UBS. We look at what went wrong and why and what lessons can be learned from this series of events.

Why and how were the lessons of the 2007 SocGen event ignored?

Included in this case study we have a special section on rogue traders generally in which we deal with issues such as;

• The psychology of the rogue trader
• Types of traders
• The FSA investigation and their findings
• Ranking Adoboli in the rogue traders league

Stanley Epstein has had extensive experience in banking and IT specifically the operations, payments, RTGS and the operational risk aspects of banking in the UK, Europe, the USA, Australia and Southern Africa. His bank-operations, payments systems, operational risk and clearing house experience is wide ranging and includes working closely with organisations such as UNCITRAL, Deutsche Bank and CHIPS in New York; APACS, British Bankers Association, CLS and Barclays Bank in London; Crédit Agricole in France; UBS and Credit Suisse in Switzerland, the central bank in the Netherlands; Alpha Bank in Greece; the central bank in Romania; the central bank in Kazakhstan; Bank Leumi and the central bank in Israel; the Standard Bank, Clearing Bankers Association; Bankserv and the central bank in South Africa and ANZ and Commonwealth Bank in Australia.

Commencing his career at the Standard Bank of South Africa he gained a thorough grounding in all aspects of banking ranging from the bank’s branch system, back-office payments processing. He was also closely involved in the development of electronic banking at the Standard Bank. At a banking industry level he was involved in the creation and development of STRATE (Central Securities Depository in South Africa dealing with the dematerialization, clearing and settlement of all financial instruments in that country. He also served as Vice Chairman of the South African Clearing Bankers Association’s ERAG Group (an interbank payments/operations risk initiative established to identify & eliminate operational, legal and other risks in electronic payments) and later as Chairman of the Payments Association of South Africa Operational Risk Committee. On leaving South Africa he joined Fundtech Corporation, a leading provider of financial technology based in the US.

Stanley has a Master’s degree in Economics which he earned with a dissertation on Financial Innovation and a Bachelor of Commerce degree in Accounting.