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FRM Powerpoints 2011 Unit IIIB Operational and Other Risks

FRM Powerpoints 2011 Unit IIIB Operational and Other Risks...

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III. Managing Non-Market Risks B. Operational and Other Risks
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Version: January 3, 2011 Unit III.B p. 2 of 25 Operational Risk o Also called operations risk o Very important in banking o Basel Committee definition: n the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events
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Version: January 3, 2011 Unit III.B p. 3 of 25 Operational Risk (cont.) o It is the risk associated with n Processes n People n Technology n Events
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Version: January 3, 2011 Unit III.B p. 4 of 25 Operational Risk (cont.) o Some examples of operational risk events n Terrorist actions n Computer failures (shutdowns, bugs, viruses, hacking, programming errors) n Human mistakes n Rogue trading and fraud n Weather n Product liability n Anything else!
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Version: January 3, 2011 Unit III.B p. 5 of 25 Operational Risk (cont.) o Evidence in operational risk in banking n 2002 Basel Committee survey, 89 banks, 47,000 operational risk events
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Version: January 3, 2011 Unit III.B p. 6 of 25 Operational Risk (cont.) Business Line of the Bank Percentage of Loss Events Percentage of Gross Amount Loss Corporate finance 0.89% 3.51% Trading and Sales 10.86% 14.92% Retail Banking 61.10% 29.36% Commercial Banking 7.22% 28.95% Payment & Settlement 3.92% 3.25% Agency Services 3.15% 4.25% Asset Management 2.35% 2.78% Retail Brokerage 6.91% 11.72% Unclassified 3.59% 1.26%
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Version: January 3, 2011 Unit III.B p. 7 of 25 Operational Risk (cont.) Type of Event Percentage of Loss Events Percentage of Gross Amount Loss Internal fraud 3.31% 7.23% External fraud 42.39% 15.54% Employment practices & workplace safety 8.52% 6.76% Clients, products, & business practices 7.17% 13.14% Damage to physical assets 1.40% 24.29% Business disruption & system failures 1.14% 2.73% Execution, delivery & process management 35.07% 29.41% Other 0.99% 0.91%
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Version: January 3, 2011 Unit III.B p. 8 of 25 Operational Risk (cont.) o Managing Operational Risk n Evolution of the view of operational risk n Effect of 9-11 n Role of auditing
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