Page 32 - Banking Finance April 2025

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Basel Committee on Banking Supervision industry standards and past incidents to ensure no sig-
nificant risks are overlooked.
(BCBS)
Flowcharts and Process Maps: Analyzing internal pro-
The Basel Committee has been instrumental in shaping
cesses to identify points where failures could occur.
ORM practices through its Basel II and Basel III frameworks.
Basel II introduced the concept of operational risk and pro- Historical Data Analysis: Reviewing past operational
vided guidelines on how banks should calculate capital re- failures and incidents to identify recurring risks.
quirements to cover potential operational losses. Basel III Interviews and Surveys: Conducting interviews and
further reinforced these guidelines by emphasizing risk surveys with employees to gather insights on potential
management and improving the resilience of banks. operational risks.

ISO 31000 2. Risk Measurement
ISO 31000 is an international standard for risk manage- After identifying potential risks, the next step is to measure
ment, providing principles, frameworks, and processes for their potential impact and likelihood. Common techniques
managing risks effectively. It offers a systematic approach include:
to identifying, assessing, and mitigating risks, including op- Risk Matrix: A visual tool that plots risks on a matrix
erational risks. based on their likelihood and impact, helping prioritize
them.
COSO Framework Key Risk Indicators (KRIs): Metrics that provide early

The Committee of Sponsoring Organizations of the warning signs of potential risk events.
Treadway Commission (COSO) framework focuses on inter- Loss Distribution Approach (LDA): A statistical method
nal controls and enterprise risk management. It provides a used to model potential losses from operational risks.
comprehensive approach to identifying and managing op-
Scenario Analysis: Evaluating the potential outcomes
erational risks within an organization.
of different risk scenarios to understand their possible
effects.
Local Regulatory Bodies

In addition to international frameworks, local regulatory 3. Risk Evaluation
bodies such as the Reserve Bank of India (RBI) in India, the Risk evaluation involves comparing the measured risks
Federal Reserve in the USA, and the European Central Bank against the bank's risk appetite and tolerance levels to
(ECB) in Europe have their own guidelines and requirements determine their significance. This helps in prioritizing risks
for operational risk management that banks must adhere to. and deciding on appropriate mitigation strategies.
Risk Appetite Statement: A formal declaration of the
Risk Assessment Techniques level of risk the bank is willing to accept.
Effective operational risk management begins with a thor-
ough assessment of potential risks. This involves identifying,
measuring, and evaluating risks to understand their poten-
tial impact on the bank.

1. Risk Identification
Risk identification is the first step in ORM, involving the
systematic identification of potential operational risks that
a bank might face. Techniques for identifying risks include:
Brainstorming Sessions: Engaging stakeholders from
different departments to generate a comprehensive list
of potential risks.
Checklists: Utilizing standardized checklists based on

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