Conference Description:

Fundamentals of Operational Risk Management - from Assessment to Implementation


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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 program. Aimed at the financial services industry this course explores the Operational Risk management 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 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 issues like bank ATM collapses, bank operating system failures, regulatory settlements (fines) in the ongoing US sub-prime mortgage saga, rogue traders and the related risk managers who either missed or were willfully blind to all the warning signs.

As the size and complexity of financial institutions has 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.

Operational Risk Management (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 up 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.
Operations Risk
Active Management & Compliance



Which organizations should attend?

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



Who should attend the course?

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

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.



Learning Objectives:

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 Operational Risk Management. 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



AGENDA

Day 01(8:30 AM - 5:30 PM)

THE WHY, HOW & WHAT OF OPERATIONAL RISK
What is risk?
Operational Risk – The big picture
Dimension & drivers of risk management
Business drivers
Regulatory drivers
Rating Agencies & risk
Cross-border implications
What is the value of Operational Risk Management?
Risk Types
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 operational 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
Managing Operational Risk
Implementation issues
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?
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 occur in reality.
Case Study: We take detailed look at the US$ 7.2 billion loss at SocGen, its causes, the key warning signals that were overlooked, and the consequences for the financial industry.
Case Study: Understanding why legacy systems pose an operational risk.
Why are so many banks facing recurring IT outages and IT related crisis? We look at the evolution of IT technology in the financial sector and understand why methodologies used have created a huge operational risk potential for some of the largest banks.
Group Discussion: How to solve the legacy system problem.
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
COSO in finer detail
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.
Operational Risk & Basel
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 Operational 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
Responsibilities



Day 02(8:30 AM - 5:00 PM)

IMPLEMENTATION
Developing an appropriate Risk Management Environment
Policy & structure
Developing an appropriate risk management environment
Implementation
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 & Operational Risk
Case Study: Poor financial product design and Operational Risk
The recent global financial crisis was triggered by the Sub-Prime Mortgage problem in the United States. The repercussions are still being felt today bank after bank are sanctioned with fines and other penalties. This case study clearly illustrates how insufficient or total lack of attention to the basic principles of Operational Risk Management in the detail and stress testing of the financial products based on Mortgages, its various derivatives and their processes and operational led to financial meltdown in the US and worldwide financial contagion.
MANAGING OPERATIONAL 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 operational risk management plan)
Minimum control requirements
Risk identification tools
Current Operational 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 and developing “risk themes” and get to grips with how the operational 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 STUDIES
The final two case studies examines and analyses two recent rogue trading “events”
Kweku Adoboli – from rising UBS star to rogue trader.
Bruno Iksil “The London Whale” – what went wrong with JP Morgan’s internal operational risk/ oversight procedures?
These case studies based on two recent events provides an in-depth examination of operational risk management failures at two international banks, UBS and JP Morgan.

We examine what went wrong, how they compare and what lessons can be learned from these events.

Included in these concluding case studies is a special section on Rogue Traders in which we cover issues such as;
The psychology of the rogue trader
Types of traders
The FSA investigation and their findings
What other rogue traders make the rogue traders “league table”?
Ranking Adoboli in the rogue traders league



SPEAKER

Richard Barr
Operational Risk & Back Office Specialist

Richard Barr, holds a B.S. in International Business Administration from San Jose State University in California. His professional experience spans over 23 years, 5 of which were spent with Wells Fargo Bank. Another 5 were spent honing his global banking skills, when Richard was intimately involved with International Trade Finance, Real Time Gross Settlement and Cross Border Banking. The past 14 years have been in the private and high-tech sectors providing high-level consulting services, business analysis, project management and training to a wide range of banking clientele across the globe.

Richard has also filled the role of advisor to central banks on payment systems and technical payments issues. Furthermore, key staff members from the Bank of England, South African Reserve Bank, Central Bank of Ireland, Bank Indonesia, European Central Bank and Bank of Portugal have attended training sessions presented by Richard.



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