Page 49 - Banking Finance October 2015

ARTICLE

5.3. Operational Risk Management committee for risk management and seek to protect the
interest of the depositors/shareholders of the bank.
Always banks live with the risks arising out of human er-
ror, financial fraud and natural disasters. The recent hap- As per the guidelines issued, capital adequacy was consid-
penings such as WTC tragedy, Barings debacle etc. has ered panacea for risk management and all banks were
highlighted the potential losses on account of operational advised to have Capital Adequacy Ratio (CAR) atleast 8
risk. Exponential growth in the use of technology and in- per cent. CAR is the ratio of capital to risk weighted as-
crease in global financial inter-linkages are the two pri- sets and it provides the cushion to the depositors in case
mary changes that contributed to such risks. Operational of bankruptcy.
risk, though defined as any risk that is not categorized as
market or credit risk, is the risk of loss arising from inad- This accord is based on three pillars, viz. Pillar I: Minimum
equate or failed internal processes, people and systems or Capital Requirement, Pillar II: Supervisory Review, Pillar
from external events. III: Market Discipline.

Operational risk involves breakdown in internal controls Fig.2. Structure of Basel II Accord
and corporate governance leading to error, fraud, perfor-
mance failure, compromise on the interest of the bank
resulting in financial loss. Putting in place proper corpo-
rate governance practices by itself would serve as an ef-
fective risk management tool. Bank should strive to pro-
mote a shared understanding of operational risk within
the organization, especially since operational risk is often
intertwined with market or credit risk and it is difficult to
isolate.

5.4. Group Risk Management RBI Guidelines on Basel III Capital Regulations have been
implemented from April 1, 2013. Bank has put in place
Group Risk Management aims to put in place standardised appropriate mechanism to comply with these guidelines.
risk management processes in Group entities. The Group India is one of the first few countries to implement the
Internal Capital Adequacy Assessment Process (Group Basel-Ill guidelines while USA and EU Block, are not yet on
ICAAP) assesses relevant risks and mitigation measures for board.
capital assessment, including under stressed conditions. A
Group ICAAP Policy to ensure uniformity in ICAAP exer-
cises of Group entities is in place. A quarterly analysis of
risk-based parameters for Credit Risk, Market Risk, Opera-
tional Risk, Concentration Risk, Liquidity Risk and Conta-
gion Risk is presented to Group Risk Management Com-
mittee/ Risk Management Committee of the Board.

5.5. Base Implementation 5.6. Enterprise risk management:

In order to help the banks to recognize the different kinds For assessment of Pillar I risks and Pillar 2 risks such as
of risks take adequate steps to overcome the under capi- Liquidity Risk, Interest Rate Risk, Credit Concentration
talization of banks assets and lessen the credit and opera- Risk, as well as adequacy of Capital and overall Risk Man-
tional risks faced by banks. Banks,of International Settle- agement practices under normal and stressed conditions,
ment (BIS) set up Basel Committee on banking supervision the Bank has comprehensive Internal Capital Adequacy
in 1988, which issued guidelines for updating risk manage- Assessment Process (ICAAP) in place.
ment in banks. These guidelines brought about standard-
ization and universalization among the global banking As part of the Risk Management Project being undertaken

BANKING FINANCE | OCTOBER | 2015 | 49

Copyright@ The Insurance Times. 09883398055 / 09883380339