Operational Risk Management in Banking Sector: an Overview

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ReseaRch PaPeR


Volume : 3 | Issue : 1 | January 2013 | ISSN - 2249-555X

Operational Risk Management in Banking Sector: An overview

Rakesh Chutia
Assistant, State Bank of India Margheita-786181 Dist.-Tinsukia Assam
ABSTRACT Operational risk is inherent in all banking products, activities and processes and systems and the effective management of operational risk is of paramount importance for every bank’s board and senior management. With globalization and deregulation of financial markets, increased competition combined with the advent of high-end, innovative, sophisticated technology tremendous changes have taken place in the products distribution channels and service delivery mechanism of the banking
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• 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 misperformance, and vendor disputes. OPERATIONAL RISK MANAGEMENT PROCESS: Operational Risk management generally encompasses the process of identifying risks to the bank, measuring exposures to those risks), ensuring that an effective capital planning and monitoring programme is in place, monitoring risk exposures and corresponding capital needs on an ongoing basis, taking steps to control or mitigate risk exposures. • Identification of operational risk. Banks should identify and assess the operational risk inherent in all products, services, activities, processes and systems. Effective risk identification should consider both internal factors (such as the bank’s structure, the nature of the bank’s activities, the quality of the bank’s human resources, organizational changes and employee turnover) and external factors (such as changes in the industry and technological advances) that could adversely affect the achievement of the bank’s objectives. • Assessment of Operational Risk. In addition to identifying the risk events, banks should assess their vulnerability to these risk
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