Operational Risk Management

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Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compelled to encounter various types of financial and non-financial risks. Risks and uncertainties form an integral part of banking which by nature entails taking risks. There are three main categories of risks; Credit Risk, Market Risk & Operational Risk.
Always banks live with the risks arising out of human error, financial fraud and natural disasters. The happenings such as WTC tragedy, Barings
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* Clients, products and business practices - For example, fiduciary breaches, misuse of confidential customer information, improper trading activities on the bank’s account, money laundering, and sale of unauthorized products. * Damage to physical assets - For example, terrorism, vandalism, earthquakes, fires and floods. * Business disruption and system failures - For example, hardware and software failures, telecommunication problems, and utility outages. * Execution, delivery and process management - For example: data entry errors, collateral management failures, incomplete legal documentation, and unauthorized access given to client accounts, non-client counterparty mis-performance, and vendor disputes.
Relevance of Operational risk function
Growing number of high-profile operational loss events worldwide have led banks and supervisors to increasingly view operational risk management as an integral part of risk management activity. Management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, and reduce errors in transaction processing, and so on. However, what is relatively new is the view that operational risk management is a comprehensive
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