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GCC Regulators’ Summit Operational & Market Risk Developments and Challenges in the GCC

GCC Regulators’ Summit Operational & Market Risk Developments and Challenges in the GCC. Michael Zamorski Managing Director, Supervision 1 March 2009. Agenda. Overview of operational risk Operational risk management Preparedness of GCC banks Main risks faced by GCC banks

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GCC Regulators’ Summit Operational & Market Risk Developments and Challenges in the GCC

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  1. GCC Regulators’ SummitOperational & Market Risk Developments and Challenges in the GCC Michael Zamorski Managing Director, Supervision 1 March 2009

  2. Agenda • Overview of operational risk • Operational risk management • Preparedness of GCC banks • Main risks faced by GCC banks • Steps to ensure compliance with IRB approach

  3. Definition of Operational Risk Focuses on causes of operational risks: • internal processes • people • systems • external events OPERATIONAL RISK The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

  4. Elements of Operational Risk Management • Obligations of the Board of Directors • Senior Management oversight and control • Measuring & managing operational risk • Modeling operational risk • Risk mitigation techniques • Capital to cover operational risk exposures

  5. Risk Mitigation Tactics • Treat – reduce the probability of risk crystallizing through improved internal controls • Terminate – avoid the risk completely • Transfer – use insurance or outsourcing arrangements to shift the risk to another person or entity • Tolerate – accept the risk and do nothing

  6. Modeling Operational Risk • Risk factors are largely internal • Lack of industry wide benchmarks • Absence of mechanism to share loss histories across banks • Hard to predict or model “Tail Events”, which might result in a very large loss though they have extremely low probability of occurrence • Difficulties in isolating operational risk element in losses

  7. Objectives of Basel Capital Accord • To establish risk-sensitive, consistent capital adequacy standards • To risk weight bank assets by credit, market and operational risks • To focus on need for strong internal controls and governance • To encourage banks to embed risk management and capital planning as part of their management processes • To enhance industry transparency

  8. Basel II Approach - GCC Banks • Near-term … • Focus on basic indicator or standardised approach for Pillar 1 operational risk • Begin collecting data for more advanced approaches, and watch for benchmarking • Implement Pillars 2 and 3 • Long-term … • Standardised or Advanced Approach • Banks eligible to adopt Advanced Approach will do so by 2015

  9. Challenges faced by GCC banks • Improvements desired in operational risk management • Inadequate data on operational losses • Industry wide framework to share operational loss data • Challenges in developing Sound models • Ability to analyse extreme loss scenarios • Skilled and competent personnel

  10. Thank You

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