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OPERATIONAL RISK

OPERATIONAL RISK. TK 6413 Islamic Risk Management. Prof. Dato’ Dr. Kamaruddin Sharif. Norhazlina Ibrahim 0900127 Nur Aziah Che Abdul Aziz 0900323. Operational Risk. Definition of Operational Risk (IFSB):

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OPERATIONAL RISK

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  1. OPERATIONAL RISK TK 6413 Islamic Risk Management Prof. Dato’ Dr. Kamaruddin Sharif Norhazlina Ibrahim 0900127 Nur Aziah Che Abdul Aziz 0900323

  2. Operational Risk • Definition of Operational Risk (IFSB): • IIFS shall consider the full range of material operational risks affecting their operations, including the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. IIFS shall also incorporate possible causes of loss resulting from Sharī`ahnon-compliance[1]and the failure in their fiduciary responsibilities[2]. • [1]Sharī`ah non-compliance risk is the risk that arises from IIFSs’ failure to comply with the Sharī`ah rules and principles determined by the Sharī`ah Board of the IIFS or the relevant body in the jurisdiction in which the IIFS operate. • [2]Fiduciary risk is the risk that arises from IIFSs’ failure to perform in accordance with explicit and implicit standards applicable to their fiduciary responsibilities. As a result of losses in investments, IIFS may become insolvent and therefore unable to (a) meet the demands of current account holders for repayment of their funds; and (b) safeguard the interests of their IAH. IIFS may fail to act with due care when managing investments resulting in the risk of possible forgone profits to IAH

  3. Examples of Operational Loss Events

  4. Examples of Operational Loss Events

  5. Operational Risk Framework 4 steps in managing Operational Risk

  6. Operational Risk Framework

  7. Operational Risk Processes • Identification of risk through Incident Data Collection (IDC). - Based on 7 event types. - Fraud case need to be reported to eFIDS BNM. • Assessment of risk through Risk Self Assessment and Control Self Assessment (RCSA). - Questionnaires based assessment. - Risk Scorecard: severity and probability matrix. • Quantitative assessment of risk by using Value at Risk (VaR). • Mitigation of risk through Action Plan, Risk Transfer and Outsourcing. • Monitoring of risk through Key Risk Indicators (KRI).

  8. Operational Risk Dimension

  9. Primary responsibility for the management of operational risk in order that accountability and ownership is as close as possible to the activity that creates the risk thereby ensuring that effective action is taken to manage them. 1st line of defense Business Unit Establishing an independent operational risk management and control process which covers the design, implementation and review of its operational risk measurement and methodology. Responsibilities include establishing the framework for measurement of operational risk and control. Operational Risk Management 2nd line of defense Bank-wide Support Units Direct responsibility for managing specific operational risk issues pertaining to their field of expertise. Independently ensuring that the ORM process is appropriate and functioning as designed by conducting regular reviews of the ORM process and measurement. 3rd line of defense Audit Roles & Responsibilities

  10. Incident Data Collection

  11. Incident Data Collection

  12. Risk Control Self Assessment

  13. Risk Control Self Assessment

  14. Risk Control Self Assessment

  15. Key Risk Indicators • Threshold setting is depending on the organization risk tolerance level. • Threshold could have few layers.

  16. Capital Charge • 3 methods in calculating capital charge: 1) The Basic Indicator Approach (BIA) - Alpha () is standardized at 15%. 2) The Standardized Approach (TSA) - Beta factors (β) is based on specific 8 BASEL Business Lines. 3) Advanced Measurement Approaches (AMA) - Risk factors are measured according to bank’s internal Operational Risk management system using quantitative and qualitative criteria. - Determining the capital requirement is subject to the Central Bank’s approval. - To fulfill criteria set before implementing AMA.

  17. Basic Indicator Approach • Formula:

  18. Standardized Approach • Formula:

  19. Standardized Approach • 8 BASEL Business Lines:

  20. Standardized Approach • Alternative Standardized Approach (ASA) only for retail and commercial banking business lines: KRB = βRB x m x LARB where: KRB = the capital charge for Retail Banking business line βRB = the beta for Retail Banking business line m = 0.035 (replace gross income as exposure indicator) LARB = total outstanding retail loans and advances (non-risk weighted and gross of provisions), average over the past three years

  21. Gross Income Computation

  22. Gross Income Computation Islamic Banking Operation

  23. Thank You

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