Over the last decade, operational risk (OR) has occupied the

attention of regulators and risk managers at financial

institutions (FIs), mainly due to headline-grabbing,

multimillion dollar operational risk loss events. There have

been instances where rogue traders have eroded decades of

hard-won trust and, more significantly, accumulated

reserves, while bringing healthy institutions to the brink of

bankruptcy.

Unlike market or credit risk which are systemic in nature,

operational risk is firm-specific and a result of the risks

inherent in the day-to-day operations of an enterprise. Since

1998, the Basel Committee has been spearheading global

regulatory efforts to ensure that FIs develop an appropriate

framework for measuring and managing operational risk.

Using a consultative approach, the Committee in June 2004

published a revised capital adequacy framework, known as

Basel II, which included guidelines on the measurement and

management of operational risk. The Committees

recognition of a separate operational risk capital component

has been the driver in shifting the management of operational

risk from a decentralized, individual, profit-center-driven

approach to a centrally-coordinated, standardized,

enterprise-wide effort.

Operational Risk:A Paradigm Shift in Risk Management

To ensure the success of anenterprise-wide program, establisha framework and set up processes,supported by an appropriatetechnology platform that enablesthe measurement and managementof operational risk.

Establish the Framework and OR DataCollection ProcessesTo align with Basels guidelines, you must determine

a management structure that incorporates senior

management oversight and facilitates the risk

management activities of business lines and the

operational risk management department. The four

main groups of data that you need to collect to

measure and manage operational risk are loss

events, risk and control self assessments (RCSA),

key risk indicators (KRIs) and risk scenarios. You

need to put in place processes that support accurate,

consistent and complete data assimilated in these

groups.

Further, you have to establish a process to track any

management response subsequent to the input and

analysis of data captured in these groups. You must

identify the resources and required infrastructure,

and also ensure that you adopt the right, future-

proof technology platform and assess system

integration challenges.

i-flex can help you meet these requirements in the

following ways:

Framework and Processes Design the organizational structure for

operational risk management; define roles and

responsibilities

Formulate operational risk management policies

Benchmark and analyze gaps in current policies,

processes, IT systems and data with regulatory

requirements, (including local regulators and

Basel II standards) and industry best practices

Underlying Technology Platform Assist in evaluating, selecting, implementing

and testing of operational risk management

systems

Addressing Basel IIs Operational Risk Requirements

Review and redesign data management

infrastructure

Integrate systems and architect solutions

Review and redesign reporting and management

information systems (MIS)

Measure and Manage Operational RiskIn order to model operational risk, you must

understand the constraints of operational loss data

and ensure that your underlying data is consistent,

accurate and complete. For instance, identify

sources of loss data and incorporate risk mitigation

mechanisms like insurance into the modeling

process. Take steps to address areas where data is

unavailable or non-existent. Finally, consider

capturing and using supporting data such as risk

and control assessment in your model to reflect the

quality of the control environment.

Evaluate methodologies to align different classes of

data-historical (loss) with point in time (RCSA) and

that, in turn, with real time (KRI) data to optimize

the control environment and promote positive

behavioral change. You need to prioritize investment

in controls that address significant risks. In the

context of earnings volatility, it follows that key

risks are those that if realized would result in the

largest economic loss. We recommend that you

employ a system that can identify such key risks.

Your organization needs to develop a methodology

to proactively identify, monitor and measure the key

risks it is exposed to and also evaluate the strength

of mitigating factors.

i-flex can help you to:

Develop Advanced Measurement Approach

methodology for operational risk capital

Design and operationalize a Risk and Control

Self Assessment approach

Conduct operational loss data collection

workshops

Identify Key Risk Indicators across different

lines of business to assist banks in monitoring

and, subsequently, enabling the predictive

modeling of operational risk

Our Approachi-flex favors designing integrated frameworks for

managing operational risk encompassing

identification, assessment, monitoring, measurement

and mitigation. Our approach to Operational Risk

consulting is based on the following fundamental

considerations:

Banks have, till date, been focusing on

identification and control of operational risks in

a decentralized manner

Most banks today are in early stages of

formalizing operational risk measurement

frameworks

An enterprise-wide, integrated approach to

operational risk will result in the continuous

optimization of the quality of a banks control

environment and goes far beyond addressing

any immediate regulatory requirements

We advocate a comprehensive ORM maturity

assessment against global best practices as the ideal

first step. The assessment will lead to a detailed

roadmap which will be the blueprint for designing

and implementing the required policies, structure,

processes, data collection, analysis and quantitative

models. i-flexs frameworks and methodologies will

provide a well-defined path for your operational risk

initiatives, irrespective of the stage your initiatives

are in.

i-flex consultingi-flex consulting is the business, technology and

process consulting unit of i-flex solutions. Among

others, i-flex consulting has an established Risk

Management Consulting practice line which assists

banks in all areas of enterprise risk management

market, credit and operational risks.

At i-flex, the constant endeavor is to blend the

modern theoretical frameworks with a practitioners

approach based on a deep understanding of ground

realities. This blend guides the approach to our

consulting services.

requirements exclusively within the financial services

domain, we have created a knowledgebase of

methodologies, best practices, templates and

processes which forms the backbone for our

consulting services.

About i-flex solutionsi-flex solutions provides technology solutions and

consulting services exclusively to the global

financial services industry. Our single-minded focus

on the industry enables us to develop, deploy and

maintain solutions better and more efficiently than

any other technology vendor in the globe. This is

because we know your business and unique needs,

and can complement this understanding with our

seasoned experience of developing world-class

solutions for some of the best-known financial

institutions in the world.

More than 600 financial institutions in over 120

countries have preferred i-flexs products and

services. Our products and services have helped

financial institutions cut costs, respond faster to

market needs, improve service levels and

considerably reduce risks.

The unique combination of businessdomain expertise and technologystrengths puts i-flex consulting in adistinctive position to effectivelyguide banks in the implementationof Operational Risk initiatives.

PeopleOur Risk Management team consists of experienced

consultants who have an in-depth understanding of

finance and risk management. These consultants

have held direct responsibilities in managing

market, credit and operational risks in banks; have

international certifications in risk management;

have assisted large international banks as risk

management consultants and leverage their rich

practical experience to address the specific

requirements of clients.

KnowledgeWith a focus on servicing technology and business

COPYRIGHT (C) 2006 i-flex solutions

All rights reserved. No part of this work may be reproduced, stored in a retrieval system, adopted or transmitted in any form or by any means (electronic, mechanical, photographic,graphic, optic recording or otherwise), translated in any language or computer language, without the prior written permission of i-flex solutions.

Due care has been taken to make this document as accurate as possible. However, i-flex solutions makes no representation or warranties with respect to the contents hereof and shall notbe responsible for any loss or damage caused to the user by the direct or indirect use of this document. Furthermore, i-flex solutions reserves the right to alter, modify or otherwise changein any manner the content hereof, without obligation of i-flex solutions to notify any person of such revision or changes.

This announcement contains forward-looking statements regarding platforms to be supported. General availability, prices, final functions, ordering information, and terms and conditionswill be provided when the actual products are announced.

i-flex and FLEXCUBE are registered trademarks of i-flex solutions. Reveleus, Daybreak and PrimeSourcing are trademarks of i-flex solutions and are registered in severalcountries.All company and product names are trademarks of the respective companies with which they are associated.

i-flex solutions limited, i-flex Park, C/o Embassy Business Park, C.V. Raman Nagar, Bangalore-560093, India

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Connect with us at www.iflexconsulting.com e-mail: contactus@iflexconsulting.com December, 2004

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