Managing Operational Risks
Managing operational risks is a part of every business process.
If we talk of banks, there are different ways to calculate the capital charges arising out of operational risk.
Let's know them better.
Basic Indicator Approach: One of the ways is the Basic Indicator Approach.
Here, it is necessary for the banks to hold capital for operational risk.
It is equal to the average calculated over a period of three years on a preset percentage of annual gross income that is positive.
The percentage is usually 15.
This method does not call for any particular criteria.
However, banks adopting this method more or less abide by the Committee's guidance on "Sound Practices for the Management and Supervision of Operational Risk".
Its principles demand a practical approach in developing an environment that boasts of appropriate risk management, constructive actions towards identifying, evaluating, supervising, and regulating the operational risk, and sufficient public disclosure.
Standardized Approach: This approach divides the activities of bank into eight business lines.
Here, the basic indicator is the gross income for each business line.
It helps to know how big the operational risk is.
The summation of capital charge is equal to a total of the regulatory capital charges for each business lines every year.
It is calculated for a period of three years.
In case there is a negative capital charge in any of the year and in any business line, it may counteract positive capital charges for other business lines.
In addition, there is no limit to it.
Advanced Measurement Approaches: The banks have to obtain a supervisory approval for using advanced measurement approaches.
They have to prove that the method adopted by them is practical and effective.
It is important that any method applied for measuring the operational risk must be in line with the standards and definition of operation risk.
The following are the points on which the banks have to get the nod from the supervisor: oThe board of directors as well as the senior management is aggressively occupied with building the framework of operational risk management.
oThe bank has a strong operational risk management system.
It comprises of a separate operational risk management department that looks after the framework and the execution of the task.
oThe bank has ample resources to apply advanced measurement approaches in all the chief business lines, the control areas, and the audit department.
The operational risk management strategies certainly influence the bank ratings in the years ahead.
Hence, it is important that the banks make an effort to adopt an effective operational risk management approach.
If we talk of banks, there are different ways to calculate the capital charges arising out of operational risk.
Let's know them better.
Basic Indicator Approach: One of the ways is the Basic Indicator Approach.
Here, it is necessary for the banks to hold capital for operational risk.
It is equal to the average calculated over a period of three years on a preset percentage of annual gross income that is positive.
The percentage is usually 15.
This method does not call for any particular criteria.
However, banks adopting this method more or less abide by the Committee's guidance on "Sound Practices for the Management and Supervision of Operational Risk".
Its principles demand a practical approach in developing an environment that boasts of appropriate risk management, constructive actions towards identifying, evaluating, supervising, and regulating the operational risk, and sufficient public disclosure.
Standardized Approach: This approach divides the activities of bank into eight business lines.
Here, the basic indicator is the gross income for each business line.
It helps to know how big the operational risk is.
The summation of capital charge is equal to a total of the regulatory capital charges for each business lines every year.
It is calculated for a period of three years.
In case there is a negative capital charge in any of the year and in any business line, it may counteract positive capital charges for other business lines.
In addition, there is no limit to it.
Advanced Measurement Approaches: The banks have to obtain a supervisory approval for using advanced measurement approaches.
They have to prove that the method adopted by them is practical and effective.
It is important that any method applied for measuring the operational risk must be in line with the standards and definition of operation risk.
The following are the points on which the banks have to get the nod from the supervisor: oThe board of directors as well as the senior management is aggressively occupied with building the framework of operational risk management.
oThe bank has a strong operational risk management system.
It comprises of a separate operational risk management department that looks after the framework and the execution of the task.
oThe bank has ample resources to apply advanced measurement approaches in all the chief business lines, the control areas, and the audit department.
The operational risk management strategies certainly influence the bank ratings in the years ahead.
Hence, it is important that the banks make an effort to adopt an effective operational risk management approach.
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