This is an intensive course on Operational Risk Management & Mitigation – from assessing the operational risks to how to implementing a working, viable operational risk management program. Aimed at the financial services industry this course explores the Operational Risk management function and mitigation requirements as mandated in the Basel Accords.
A key objective of this course is to move the participants beyond the operational risk compliance requirements set down in the Basel Accords to an understanding of managing operational risk as a value added proposition that can be instrumental in increasing the profitability of the bank while at the same time improving its structural strength.
Now the ongoing continuum of headline-grabbing operational risk incidents at banks, other financial institutions and even regulators continue to keep the issue of operational risk management at the top of agendas of CEO’s , CRO’s, Risk Managers and Internal & External Auditors alike.
These incidents are wide ranging and flow from issues like bank ATM collapses, bank operating system failures, regulatory settlements (fines) in the ongoing US sub-prime mortgage saga, rogue traders and the related risk managers who either missed or were willfully blind to all the warning signs.
As the size and complexity of financial institutions has increased, so too have the challenges of understanding and reducing operational risks down to truly manageable levels. Increased regulatory concern and scrutiny have also increased the cost of operational risk events in the shape of outright financial loss, regulatory fines and declining customer confidence.
Operational Risk Management (ORM) is an effective tool for not only maintaining but increasing, bank profits, shareholder value, public perceptions and goodwill.
Executed properly, improvements in ORM can lead to substantial financial, reputational and regulatory benefits – all this adds up to increased profitability, greater financial stability and improved customer satisfaction – in short, a better safer bank/ financial institution.
But, to achieve these gains, financial institutions must apply a consistent and comprehensive approach to managing their operational risks. They must also understand that this approach is fundamentally different from the approaches that they use in managing market, credit and liquidity risks.
"Bad" ORM has a severely negative effect on financial institutions in four very clear ways;
- Actual operational risk losses are a direct hit to the income statement. Equally the massive fines being paid have the same effect.
- The market punishes companies, via the stock price, for operational risk failures. This loss of value could well exceed the actual financial loss experience by the risk event in the first place.
- Lowered Credit Ratings, which raises the institutions cost of borrowing money in the marketplace.
- Operational risk failures can vastly increase the cost of compliance by raising the level of regulatory scrutiny and complexity not to mention substantial penalties.
All too often banks have seen the need to effectively manage their operational risks as simply an issue of complying with what the bank regulator requires, in this case the operational risk requirements of the Basel Accords, rather than a disciplined process in its own right, that serves to not only ensure a banks survival but which can, in the long run, contribute to that bank’s financial fortune.
Active Management & Compliance
Which organizations should attend?
- Commercial Banks
- Central Banks
- Investment Banks
- Bank Regulators
- Asset Management Firms’ Representatives
- Pension Funds
- Hedge Funds
- Leasing Companies
- Insurance Companies
- Fund Managers
- Other Financial Institutions
- Financial Officers
- Risk Officers
- Internal Auditors
- Operational Risk Managers
- Compliance Officers
- Staff with roles and responsibilities in operational risk in risk management departments, businesses and central departments
- All front-, middle- and back-office staff in operational roles
- This course is not restricted to management staff alone but to all staff who are required to be “Operational Risk” aware
Implementing an effective ORM routine (“Good” Operational Risk Management) is a complex process. At its core is an understanding of what operations risk is and how it can be managed.
This course is an intensive introduction to operational risk management and mitigation. It is designed to provide a practical “hands-on” approach to participants which will furnish them with all the tools and techniques they need to begin implementing what they have learned as soon as they return to the office.
The underlying course philosophy is to move the participants beyond the largely theoretical international compliance requirements for operations risk (specifically those contained in the Basel Accords), and into an understanding of the practice of operations risk management and an ability to actually implement these procedures.
Learning Objectives:
The objectives of this training course is to provide all staff, irrespective of whether they work in the front-, middle- or back-office, with a sound foundation in the theory and practice of Operational Risk Management. This training is provided in a practical “hands-on” manner that allows them to implement what they have learned easily and effectively the minute they return to the office.
What this course covers
This course provides a complete structured package for learning in all main aspects of the subject of managing Operational Risk under the Basel Accords. It will enable participants to prepare and manage the planning and implementation of operational risk management processes in their bank/ financial institution or firm.
Key objectives and learning outcomes
The aim of the course is to provide;
- An understanding of Risk in all its facets
- What the Basel Accords say about operational risk and its mitigation
- An understanding of Operational Risk Techniques for assessing, managing and mitigating Operational Risk
- A link between Operational Risk management theory & practice
- A clear “road-map” on how to implement a Operational Risk management structure them in practice in a banking organization.
Methodology
This training course uses a combination of prepared tuition, examples, discussions, exercises and case studies.
Most importantly it will offer participants, opportunities to share experiences and plan work within small working groups, providing practice in the application of the techniques and tools generating active participation.
- THE WHY, HOW & WHAT OF OPERATIONAL RISK
- What is risk?
- Operational Risk – The big picture
- 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 operational 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
- Managing Operational Risk
- Implementation issues
- 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?
- 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 occur in reality.
- Case Study: We take detailed look at the US$ 7.2 billion loss at SocGen, its causes, the key warning signals that were overlooked, and the consequences for the financial industry.
- Case Study: Understanding why legacy systems pose an operational risk. Why are so many banks facing recurring IT outages and IT related crisis? We look at the evolution of IT technology in the financial sector and understand why methodologies used have created a huge operational risk potential for some of the largest banks.
- Group Discussion: How to solve the legacy system problem.
- The core issues in managing operational risk
- Risk Analysis
- Determining the “Risk Appetite”
- Risk impact/ Event frequency
- Impact vs. Probability
- A generic case study
- Risk financing
- Optimizing risk & reward
- The cost of risk
- The operational risk financing program
- Operational risk financing mechanisms
- How financing methods are applied
- 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 - an integrated risk management framework
- The COSO framework
- COSO in finer detail
- Codification of the 17 COSO Principles
- 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.
- 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
- Basel Standards
- Basel’s’ three approaches
- 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
- IMPLEMENTATION
- 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 & Operational Risk
- Case Study: Poor financial product design and Operational Risk
- The recent global financial crisis was triggered by the Sub-Prime Mortgage problem in the United States. The repercussions are still being felt today bank after bank are sanctioned with fines and other penalties. This case study clearly illustrates how insufficient or total lack of attention to the basic principles of Operational Risk Management in the detail and stress testing of the financial products based on Mortgages, its various derivatives and their processes and operational led to financial meltdown in the US and worldwide financial contagion.
- Case Study: Poor financial product design and Operational Risk
- MANAGING OPERATIONAL 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
- A Risk Assessment Model
- The process
- Environmental survey
- Technology inventory
- Identifying & assessing the operational risks (including an illustrative operational risk management plan)
- Minimum control requirements
- Risk identification tools
- Current Operational Risk Management Themes in Banking
- Closing CASE STUDIES
- The final two case studies examines and analyses two recent rogue trading “events”
- Kweku Adoboli – from rising UBS star to rogue trader.
- Bruno Iksil “The London Whale” – what went wrong with JP Morgan’s internal operational risk/ oversight procedures?
- These case studies based on two recent events provides an in-depth examination of operational risk management failures at two international banks, UBS and JP Morgan.
- The psychology of the rogue trader
- Types of traders
- The FSA investigation and their findings
- What other rogue traders make the rogue traders “league table”?
- Ranking Adoboli in the rogue traders league
We examine what went wrong, how they compare and what lessons can be learned from these events.
Included in these concluding case studies is a special section on Rogue Traders in which we cover issues such as;
- The final two case studies examines and analyses two recent rogue trading “events”
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.
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 and developing “risk themes” and get to grips with how the operational 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.
Richard Barr
Operational Risk & Back Office Specialist
Richard Barr, holds a B.S. in International Business Administration from San Jose State University in California. His professional experience spans over 23 years, 5 of which were spent with Wells Fargo Bank. Another 5 were spent honing his global banking skills, when Richard was intimately involved with International Trade Finance, Real Time Gross Settlement and Cross Border Banking. The past 14 years have been in the private and high-tech sectors providing high-level consulting services, business analysis, project management and training to a wide range of banking clientele across the globe.
Richard has also filled the role of advisor to central banks on payment systems and technical payments issues. Furthermore, key staff members from the Bank of England, South African Reserve Bank, Central Bank of Ireland, Bank Indonesia, European Central Bank and Bank of Portugal have attended training sessions presented by Richard.
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