Operations Risk Management and Mitigation - from Assessment to Implementation
Stanley Epstein, Banking, Payments, Operational Risk & Back Office Specialist and Bank Trainer
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||"Operations Risk Management & Mitigation - from Assessment to Implementation" - This course is approved by NASBA (National Association of State Boards of Accountancy). Seminar attendees are eligible for 16.5 CPE credits upon completion of training.
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 system. Aimed at the financial services industry this course explores the Operational Risk Management (ORM) 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 in 2014, 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 bank ATM collapses, bank operating system failures, regulatory settlements in the ongoing US sub-prime mortgage saga, rogue traders and the connected risk managers who either missed or were willfully blind to all the warning signs.
As the size and complexity of financial institutions have 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
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 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.
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.
Operations Risk -
Active Management & Compliance
Which organizations should attend?
Who should attend the course?
- 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
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 ORM. 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 ORM theory & practice
- A clear "road-map" on how to implement an ORM structure in practice in a banking organization.
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.
We are registered with and adhere to the Statement on Standards for Continuing Professional Education programs of the National Registry of CPE Sponsors. Our registration number is 109066. Please check with the governing body of your license and state for specific CPE requirements. Grievances may be forwarded to the company at Ph: 650 620 3961; email: firstname.lastname@example.org. Grievances may also be forwarded to the National Registry of CPE Sponsors-NASBA, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417, 615-880-4200, www.nasba.org, e-mail email@example.com.
Field of Study:
- Management Advisory Services: 7 CPE Credits
- Economics: 2 CPE Credits
- Auditing: 1 CPE Credit
- Business Management and Organization: 1 CPE Credit
- Computer Science: 1 CPE Credit
- Production: 1 CPE Credit
- Regulatory Ethics: 1 CPE Credit
- Specialized Knowledge and Applications: 1 CPE Credit
- Statistics: 1 CPE Credit
- Social Environment of Business: 0.5 CPE Credit
- Total CPE credits earned in this seminar: 16.5 CPE Credits
Program Delivery Method: Group-Live
Program Level: Basic
Advance Preparation/Program Prerequisites: None
|Day One (8:30 AM – 5:30 PM)
||Day Two (8:30 AM – 5:00 PM)
Registration Process: 8:30 AM – 9:00 AM
Session Start Time: 9:00 AM
THE WHY, HOW & WHAT OF OPERATIONAL RISK
What is risk?
- Operational Risk – The big picture
- A short history of risk
- Dimension & drivers of risk management
- Business drivers
- Regulatory drivers
- Rating Agencies & risk
- Cross-border implications
- What is the value of Operational Risk Management?
- 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 operations 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
- Implementation issues
Managing Operations Risk
- 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?
- Compliance requirements
- Operational risk – definition and examples
- Enterprise Risk Management
- Key elements in managing operations risk
- A selection of case studies to illustrate the material covered
- The banking activity framework - the “Top-Down” approach of the BIS
- Main areas affected by operational risk
- Key Risk Factors
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 can be encountered.
- Case Study: We take detailed look at the 2007, US$ 7.2 billion loss at SocGen, its causes, the key warning signals that were overlooked, and the consequences for the financial industry.
Key Elements in Managing Operational Risk
- The core issues in managing operational risk
- Risk Analysis
- Determining the “Risk Appetite”
- Risk impact/ Event frequency
- Impact vs. Probability
- A generic case study
Operational Risk Financing
- Risk financing
- Optimizing risk & reward
- The cost of risk
- The operational risk financing program
- Operational risk financing mechanisms
- How financing methods are applied
Methods & Models
- 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 ERM Framework
- COSO - an integrated risk management framework
- The COSO framework
- Codification of the 17 COSO Principles
The Black Swan
- 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.
Operations Risk & Basel (II and III)
- 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
Managing Operations Risk under Basel - A “Hands-on” approach
- Basel Standards
- Basel’s’ three approaches
"Sound Practices for the Management and Supervision of Operational Risk"
- 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
Developing an appropriate Risk Management Environment
- Policy & structure
- Developing an appropriate risk management environment
- 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 & Operations Risk
- Case Study: The US Sub-Prime Mortgage Crisis
- The 2008 Global financial crisis was triggered by the Sub-Prime Mortgage problem in the United States. This case study clearly illustrates how insufficient or total lack of attention to Operations Risk in the detail and stress testing of the Mortgage Product, its various derivatives as well as the processes and operations led to financial meltdown in the US and its contagion across the globe.
MANAGING OPERATIONS 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
- 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.
A Risk Assessment Model
- The process
- Environmental survey
- Technology inventory
- Identifying & assessing the operational risks (including an illustrative operations risk management plan)
- Minimum control requirements
- Risk identification tools
Current Operations Risk Management Themes in Banking
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 “risk themes” and get to grips with how the operations 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.
Closing CASE STUDY
- Kweku Adoboli – from rising star to rogue trader
This case study on a recent event provides an in-depth examination of operational risk management failures resulted in substantial losses to UBS. We look at what went wrong and why and what lessons can be learned from this series of events.
Why and how were the lessons of the 2007 SocGen event ignored?
Included in this case study we have a special section on rogue traders generally in which we deal with issues such as;
- The psychology of the rogue trader
- Types of traders
- The FSA investigation and their findings
- Ranking Adoboli in the rogue traders league
Meet Your Instructor
Banking, Payments, Operational Risk & Back Office Specialist and Bank Trainer
Stanley Epstein has had extensive experience in banking and IT specifically the operations, payments, RTGS and the operational risk aspects of banking in the UK, Europe, the USA, Australia and Southern Africa.
His bank-operations, payments systems, operational risk and clearing house experience is wide ranging and includes working closely with organisations such as UNCITRAL, Deutsche Bank and CHIPS in New York; APACS, British Bankers Association, CLS and Barclays Bank in London; Crédit Agricole in France; UBS and Credit Suisse in Switzerland, the central bank in the Netherlands; Alpha Bank in Greece; the central bank in Romania; the central bank in Kazakhstan; Bank Leumi and the central bank in Israel; the Standard Bank, Clearing Bankers Association; Bankserv and the central bank in South Africa and ANZ and Commonwealth Bank in Australia.
Commencing his career at the Standard Bank of South Africa he gained a thorough grounding in all aspects of banking ranging from the bank’s branch system, back-office payments processing. He was also closely involved in the development of electronic banking at the Standard Bank. At a banking industry level he was involved in the creation and development of STRATE (Central Securities Depository in South Africa dealing with the dematerialization, clearing and settlement of all financial instruments in that country. He also served as Vice Chairman of the South African Clearing Bankers Association’s ERAG Group (an interbank payments/operations risk initiative established to identify & eliminate operational, legal and other risks in electronic payments) and later as Chairman of the Payments Association of South Africa Operational Risk Committee. On leaving South Africa he joined Fundtech Corporation, a leading provider of financial technology based in the US.
Stanley has a Master’s degree in Economics which he earned with a dissertation on Financial Innovation and a Bachelor of Commerce degree in Accounting.
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