r92723030 沈子喬 r92723037 陳禹君 r92723049 蔡少懷 r92723030 沈子喬 r92723037 陳禹君...

R92723030 R92723030 沈子喬沈子喬

R92723037 R92723037 陳禹君陳禹君

R92723049 R92723049 蔡少懷蔡少懷

R92723030 R92723030 沈子喬沈子喬

R92723037 R92723037 陳禹君陳禹君

R92723049 R92723049 蔡少懷蔡少懷

Presented by

Operational and Technology RisksOperational and Technology Risks

Part II Operational Risk in BaselⅡ

Part III Operational Risk Management In Practice

Part I The Introduction to Operational Risk

I n d e x

Step 1: An idea of operational risk

Step 2: Technology and Financial Service

Step 3: The Effect of Technology on Revenues and Costs!

Step 4: Technology in Payments System

Step 5: Managing Operational Risk

Introduction to Operational Risk

Part I


Difficult to measure, yet crucial ！

Market risk5%

Credit risk60%

Other risk5%Operational

risk30%

An idea of Operational Risk

Major risks faced by banks!

Source: The New Basel Capital Accord: Basel II, Jan 2001

What is Operational Risk ?

Operational risk and inclusive of technological risk is the risk of

loss resulting from inadequate or failed internal processes 、people 、 and systems or from external events.

Some FIs add “Reputational risk and strategic risk as part of a

broader definition (e.g., due to a failed merger).

Definition by BIS,Working Paper on the Regulatory Treatment of Operational Risk, Sep, 2001


direct and indirect

1. Technology (e.g., technological failure and deteriorating systems)

2. Employees (e.g., human error and internal fraud)

3. Customer relationships (e.g., contractual disputes)

4. Capital assets (e.g., destruction by fire or other catastrophes)

5. External (e.g., external fraud)

What are the source of Operational Risk ?


A summary of operational risks faced by FIs

Table 14-8


Employee turnover

Key personnel risk

Fraud risk

Error

Rogue trading

Money laundering

Confidentiality breach

Programming error

Model risk

Mark-to-market error

Management information

IT systems outage

Telecommunications failure

Technology provider failure

Contingency planning

Technology Risk

Employee Risk

Customer Risk

Contractual disagreement

Dissatisfaction

Default

Capital Asset Risk

Safety

Security

Operating Costs

Fire / flood

External Risk

External fraud

Taxation risk

Legal risk

War

Collapse of markets

Reputation risk

Relationship risk

How can operational failure affect an FI?

Tearful Lessons!!

The effects of operational failure!

楊瑞仁在國票案中吞占國票１０２ . ２億元國票案

資深法務人員 ( 劉偉杰 ) 監守自盜３０億元理律案

年僅 28 歲的高級期貨交易員 Nick Lesson ，以短短 2 年半的時間，搞倒具有 232 年歷史的霸菱銀行，最後落得以 1 英鎊象徵性的價格，被荷蘭國際銀行（ ING ）所收購。

霸菱案


The application of computers, audio and visual communication

systems, and other information systems to an FI’s production of

service.

1. Lower costs by combining labor and capital in a more efficient mix.

2. Increased revenues by allowing a wider array of financial services to be produced or innovated and sold to customers.

Technology

The most important factor affects the profitability and riskness

of modern FIs.

Technology and Financial Service

Wholesale Financial ServicesWholesale Financial Services

How modern technology affect an FI’s profit-producing area ?

Technology improves FIs’ abilities to provide cash management

or working capital services to corporate customers, who start to

recognize that:

1. Excess cash balances result in a significant opportunity cost.

2. Corporate need to know cash or working capital position on a real-time basis.


企業金融企業金融 Wholesale Financial ServicesWholesale Financial Services

The services provided to help corporate customer manage their financial position.

1. Controlled disbursement accounts.2. Account reconciliation. 3. Wholesale lockbox.4. Electronic lockbox5. Funds concentration.6. Electronic funds transfer7. Check deposit services8. Electronic initiation of letters of credit.9. Treasury management software.10. Electronic data interchange11. Facilitating business-to-business e-commerce12. Electronic billing13. Verifying identities14. Assisting small business entries into e-commerce.


一般企業金融產品資金管理

風險管理

外匯業務

OBU 國際金融業務授信業務信託業務

資本市場金融產品台幣資本市場金融產品

外幣資本市場金融產品

企業電子金融產品金融電子資料交換系統 (FED

I)

企業資金管理系統

企業貸款集中支付管理系統整批轉帳系統

人事薪資管理系統

股利代發管理系統各種轉帳代收業務


企業金融企業金融 Wholesale Financial ServicesWholesale Financial Services

In Taiwan, banks offer such service for corporate customers as follows:

A typical customer transaction through a branch or phone call costs a

customer about $1, while a similar online transaction costs just $0.02 !

Some of the most important retail payment product innovations include:

1. Automated teller machines (ATMs)

2. Point-of-sale (POS)

3. Home banking

4. Preauthorized debits/credits.


個人金融 Retail Financial Services

Researched by Merrill Lynch

5. Paying bills via telephone

6. Smart-cards (store-value cards)

7. On-line banking

8. E-mail billing

By virtue of technology

FIs no more made money only by

interest spread earnings

They are financial service providerfinancial service provider now !


Technology can improve FI’s profitability through means of:

Electronicprocessing and storagesystem

The Effect of Technology on Revenues and Costs!

Profit FunctionProfit Function Interest income - Interest expense

Other income- Noninterest expense

Provision for loan losses

Earnings or Profit before taxes

+

-=

Increase Interest Income

Lower Interest Expense

Increase Other Income

Decrease Noninterest Expense

a) Link to interbank lending market.

b) Originate and sell

commercial paper, entering lower-cost funding market.

Offering innovative products and better payment system

Cross Selling (Data Mining)

INCOME DATA 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Total interest income $429,818 $486,800 $512,229 $441,563 $433,109 $408,722 $385,078 $373,388 $321,301 $311,198

Total interest expense 152,838 235,010 276,505 218,029 221,168 205,600 192,188 190,705 144,689 140,263

Net interest income 276,981 251,791 235,724 223,535 211,941 203,122 192,890 182,683 176,612 170,935

Provision for loan and lease losses 51,355 46,296 32,034 23,268 23,991 22,035 18,746 14,723 13,442 21,123

Total noninterest income 182,526 168,791 164,837 154,238 132,901 111,527 101,081 89,545 82,398 82,857

Total noninterest expense 262,751 251,095 241,588 228,169 217,687 191,056 186,391 171,562 167,466 164,587

Securities gains (losses) 12,124 8,734 -1,484 1,630 5,585 3,102 2,016 1,005 -478 3,460

Applicable income taxes 52,122 44,025 43,706 45,553 37,226 36,726 31,297 30,285 26,201 23,696

Extraordinary gains, net -49 -649 -35 174 424 14 -155 -295 -439 2,066

Net income 105,353 87,250 81,714 82,587 71,947 67,950 59,398 56,368 50,985 49,913

Total noninterest Expense / TotalInterest Expense 1.72 1.07 0.87 1.05 0.98 0.93 0.97 0.90 1.16 1.17

Dollar Figures in Millions

Earnings and Other Data for All Insured Banks

Source: Federal Deposit Insurance Corporation website

Update Table 14-1


Underscoring the importance

of operating costs is the fact

that non-interest expenses

gradually exceeds interest

expense. 0.00

0.50

1.00

1.50

2.00

2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Total noninterest Expense / Total Interest Expense

0

50,000

100,000

150,000

200,000

2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Total noninterest income

Noninterest income of

banks increase steadily.


Make or Break?

Profitability V.S. Technology!

The effect of regulation and regulatory changes can not be ignored!


Product revenue sideProduct revenue sideProduct revenue sideProduct revenue side Operating cost sideOperating cost sideOperating cost sideOperating cost side

Technology on product revenue sideTechnology on product revenue side

1. Cross-marketing both new and existing products to customers.

2. Increase the rate of innovation of new financial products.

3. Service quality and convenience.


Technology on Operating cost side Technology on Operating cost side

In general, technology may favorably affect an

FI’s cost structure by allowing it to exploit either

economies of scale or economies of scope.


Economies of scale Economies of scale As the output of an FI increases, its average costs of production fall.

ACi = Average costs of the ith FITCi = Total costs of the ith FISi = Size of the FI measured by assets, deposits, or loans.

Cost-lowering effects of

technology on FIs of all size but

with the greatest benefit

accruing to those of the largest

size.


A v e ra g e C o s t

S ize

A v e ra g e C o s t fu n c t io n o f f in a n c ia l f ir m s

0

A C B

A C A

A B

T C i =A C i SiTC i =A C i Si


S ize

A C 2

0

A C 1

Yet FIs may face diseconomies of scale and other shape of AC function!


Economies of scaleEconomies of scale

S* is the most efficient size for an FI to invest.


S ize

A C


S ize

A C

0

Diseconomies of scale!

As the output of an FI increase, its average costs of production increase. (e.g. Excess capacity, integration problems, cost overruns, cost control problems)


S i z e

A C

0

The FI’s abilities to generate synergistic cost savings

through joint use of inputs in producing multiple products.

ACACA+B A+B [X[X11, X, X22] < AC] < ACAA[X[X11,0] + AC,0] + ACBB[0,X[0,X22]]

Nevertheless, diseconomies of scope may occur instead!


Economies of scopeEconomies of scope

Testing for Economies of Scale and Economies of ScopeTesting for Economies of Scale and Economies of Scope

FIs must specify both the inputs to their production process and the cost of those inputs

The Production ApproachThe Production Approach

The Intermediation ApproachThe Intermediation Approach

C = f (y, w, r)

C = f (y, w, r, k)

w = Wage costs of laborr = Rental costs of capitaly = Output of services

k = The cost of funds for the FI. The intermediary uses to produce intermediated service.


Can earnings always exceed expense? Can earnings always exceed expense?

Investment on technology allows an FI to earn potentially higher profits, but not for sure because:

Agency Conflicts


A growth-oriented investment may be in consistent with

stockholder’s value-maximizing objectives.

NPV (Technology investment project) <０ .

Io = Initial capital outlay for developing an innovation or product at time 0Ri = Expected net revenues or cash flows from product sales in future years i, i = 1…..Nd = FI’s discount rate reflecting its risk-adjusted cost of capital

The initial cash outlay and future costs related to these investments are unable to be offset.

0I RN

(1 + d )N+ ...+

Empirical Findings

1. Only a small part of the cost differences among FIs in any size class can be economies of scale or scope.

2. A majority of the studies shows the relatively low payoff from technological innovation.

3. Large FIs tend to be more efficient in revenue generation than smaller FIs and that such efficiencies may well offset scope and scale cost inefficiencies related to size.

4. Real benefits of technological innovation are difficult to measure through traditional studies.


American Practice1. Fed wire operated by Federal Reserve2. Privately operated Clearing House Interbank Payments System

(CHIPS)Table 14-5

This trend can partly be attributed to the

development of “sweep accounts”.

Sweep accountsCustomers can automatically switch funds from high-reserve requirement checking accounts into low-reserve requirement savings accounts

In 2000

The average daily Fedwire funds value $1.5 trillion

The average daily CHIPS value $1.2 trillion

Technology in Payments System

The two dominant wire transfer systems are

1 97 0

1 98 0

1 98 3

1 98 5

1 99 0

1 99 4

1 99 7

2 00 0

2 %

1 7

3 8

4 2

8 0

8 1

2 43

2 66

%

%

%

%

%

%

%

T h e R a t io o f A v e r ag e D a i ly

a n d P a ym e n ts ($ ) to B a n k R e se rv e s

F e d w ire C H IP S

6 major risks have arisen along with the growth of wire transfer systems.

1. Daylight Overdraft Risk

2. International Technology Transfer Risk

3. Crime and Fraud Risk

4. Regulatory Risk

5. Tax Avoidance

6. Competition Risk



When a bank’s reserve account at the Fed becomes negative within the banking day.

A possibly greatest potential sources of instability in the financial markets today!

Under Federal Reserve Act, the member bank’s end-of day reserve position cannot be negative.

Daylight Overdraft

R e s e r v e s a t b e g in n i n g o f d a y

R e s e r v e s a t e n d o f d a y

R e s e r v e s b a la n c e s

e n t e r o v e r d ra f t s ta t u s

9 : 0 0 A M

F e d w i re o p e n s

f o r th e d a y

6 : 3 0 P M

F e d w i re c lo s e s

f o r th e d a y

2 : 0 0 P M

M a x i m u m

O v e r d r a f t


Settlement failure could result in disastrous systemic crisis.Settlement failure could result in disastrous systemic crisis.

Large banks seek to borrow funds in the afternoon to cover

for running daylight overdraft.

Under regulation J, the Fed guarantees payment

finality for every wire transfer message.

All within-day transfers are provisional, and

become final only at the end of the day.


Fedwire

CHIPS


The efforts to alleviate daylight overdraft risk.

1. CHIPS members contributed to a special escrow fund.

2. Implementing Regulation F: Banks, thrifts, and foreign banks must develop internal procedures of benchmarks to limit their settlement to other FIs.



What happens in Taiwan…

Negative Intervention ( 負數操作 ) 存款準備金的提存期間為一個月，銀行雖然每日計算當日超額準備的變化，但並不需要每日提足至法定水準，只要至每月 3 日的最後期限，銀行提存的存款準備積數總額，能補足應提的法定額度即可。

因此銀行於月初行性支出高峰時，市場資金水位下降，銀行實提準備低於應提準備的水準，造成負數缺口，於短期利率上揚時，擴大準備部位負數缺口，將資金投入票券等短期投資，待中旬資金寬鬆、短期利率走低之際，再從事正數操作，出脫手中票券，以填補部位缺口。



Wire transfers as methods of payment has resulted in new

problems regarding theft, data snooping, and white-collar

crime. (e.g. ATM card fraudulent duplication)

The prohibition of the use of technological innovations limits

FIs’ profitability.

2. International Technology Transfer Risk

3. Crime and Fraud Risk


The government regulation imposed in the adoption of some

financial service limits FIs’ profitability.

Internal pricing mechanisms minimize firms’ tax burden, yet

erode governments’ tax base. (e.g. BVI account)

Technology eposes existing FIs to the increased risk of

erosion of their franchises as costs of entry fall and the

competitive landscape changes. (e.g. 裕融企業 , 會計事務所介入保管業務 )

4. Regulatory Risk

5. Tax Avoidance

6. Competition Risk


Taiwanese Practice

‧ 金融機構跨行資訊系統之營運。

‧ 金融機構間跨行業務之帳務清算。‧ 辦理與金融機構間業務相關之各類資訊傳輸、交換。

‧ 金融機構間資訊系統災變備援之服務。

‧ 金融機構間業務自動化之規劃、諮詢及顧問業務。

‧ 其他經財政部指定或核准辦理之有關業務。

財金資訊公司前身為「金融資訊服務中心」（簡稱金資中心）。民國七十三年十月財政部為促進金融業之資源共享、資訊互通、並提昇整體金融自動化層面，經報奉行政院核定設立金資中心，負責全國金融機構跨行資訊網路之規劃、設計、建置工作。主要業務為金融機構跨行資訊系統的規劃開發及跨行資訊網路的營運。

The role of FISC

(Financial Information Service Co. LTD. )


• 自動化機器共用系統 • 通匯系統• 信用卡服務系統• 金融 XML 業務

The business lines:

What is FEDI ？金融電子資料交換（ Financial Electronic Data Interchange ， FEDI 、金融 EDI ）係指企業或個人利

用電腦作業，以特定的標準格式（採用聯合國 UN/EDIFACT 所制定的標準訊息），經由專線撥接與

銀行直接連線，在安全無虞的環境下進行企業或個人的付款、轉帳等資金調撥作業。

Taiwanese Practice

• 行動銀行服務系統 • 資訊查詢系統 • 轉帳卡服務系統 • I C 金融卡服務系統• 資訊系統災變備援服務

• FEDI服務系統• 代繳代發系統 • 網際網路作業系統• 資訊媒體儲存服務


Who is in charge of its failure !!

Taiwanese Practice

10 / 20/ 2003 所有銀行的跨行轉帳全面“癱瘓”

通訊控制機故障

前員工及外包人員三人和偽卡集團勾結，外洩信用卡持卡的人資料，遭這個信用卡偽卡集團盜刷的金額，超過 30億元

信用卡內碼資料外洩


Technological innovation serves to provide completely

different financial services, yet it also exposes FIs’ to the

risks of a distinct category.

The Operational Risk

The risk that FIs’ can ignore no more!


The efforts to help FIs manage losses due to operational risk.

Managing Operational Risk

Training, development, and review of employeesLoss Prevention

Planning, organization, back-up. (e.g., computer systems.)

Loss Control

External insurance. (e.g., catastrophe insurance)

Loss Financing

FI capital.

Loss InsulationC o s t

R M E *0

C o s t o f P r o b le m s

C o s t o f r is k m a n a g e m e n t e f f o r t s

To t a l C o s t

RME: Extent of risk management efforts

Figure 14-6

Operational Risk Management Effort

Regulatory Efforts to manage operational risk

1. Customer Protection

a. Does FI customers have the right to opt out of any private information sharing an FI may want to pursue?

The issues brought..

依據法令規定，金控集團旗下子公司可以交叉分享包括姓名、生日、身份證字號與電話地址的基本客戶資料。子公司如果想相互分享客戶金融交易細節，必須事前向客戶得到書面同意。

但若消費者買的是結合銀行、證券、保險等功能的綜合性商品，就不得不向金控集團旗下的各個子公司，透露攸關個人財富與金融交易的資訊。例如，中信金控的「萬股通」，可連結往來券商進行自動跨券商轉帳作業，並提供最高 50萬元新台幣的金融卡信用額度，自動結合補差額功能。因此「萬股通」客戶的帳戶資料，將會同時透露給中信金控旗下的銀行與券商。


電腦處理個人資料保護法

b. Do Internet transactions and electronic storage of

private information expose FI customer to the security risk.


1. Customer Protection

The issues brought..

　　但我國執法不力，以致造成花旗銀行資料外洩的情況，嚴重危害金融交易的安全性。


Operational risks “are sufficiently important for banks to devote

resources to quantify the level of such risks and to incorporate

them into their assessment of their overall capital adequacy.”

FIs have lost over $ 200 billion due to operational risk since 1980.

Researched by Operational Research Inc.

Basel Committee on Banking Supervision in 1999 Basel Committee


２ . 　 Operational Fisk and FI Insolvency





I n d e x

Operational Risk in BaselⅡ

• Loss Data Collection • Structure of Basel for “OpRisk”Ⅱ

– Pillar 1 : (MRC) Minimum Required Capital• Basic Indicator Approach (BIA) • Standardized Approach (SDA) • Advanced Measurement Approach (AMA)

– Pillar 2 : Supervisory Review Process

– Pillar 3 : Disclosure


Loss Data collection

• Breaking loss data into “Business Lines” and “Event Types”.


Business line / event types classification

BUSI-NESS UNITS

Level 1 Business Lines

Internal Fraud

External Fraud

Employment Practice

&

Workplace Safety

Clients, Products

& Business Practices

Damage to Physical Assets

Business Disruption

& System Failures

Execution, Delivery & Process Mgt.**

Invest-ment Banking

Corporate

Finance*

Trading & Sales

Banking Retail Banking

Commercial

Banking

Payment &

Settlement

Agency Services & Custody

Others Asset Mgt.**

Retail Brokerage

•Including Municipal/Gov’t Finance and merchant banking. ** Mgt. = management

Resources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,” September 2001.www.bis.org

Joint Combination• Corprate finance( 企業財務規劃 )

– 公司理財– 政府財務– 商人銀行– 諮詢服務

• Sales & trading( 財務交易與銷售 )– 銷售– 報價– 部位持有– 財務

• Retail banking( 消費金融 )– 消費銀行– 私人銀行– 卡片服務

• Commercial banking( 商業金融 )– 商業銀行

• e.g. 貸款保證專案融資

• Payment & settlement( 收付清算 )– 外部客戶服務

• Agency services & Custody ( 代理業務 )– 保管– 代理– 信託

• Asset management( 資產管理 )– 全權委託資金管理– 非全權委託資金管理

• Retail brokerage( 消費經紀 )– 零售經紀

Business line / event types classification

BUSI-NESS UNITS

Level 1 Business Lines

Internal Fraud

External Fraud

Employment Practice

&

Workplace Safety

Clients, Products

& Business Practices

Damage to Physical Assets

Business Disruption

& System Failures

Execution, Delivery & Process Mgt.**

Invest-ment Banking

Corporate

Finance*

Trading & Sales

Banking Retail Banking

Commercial

Banking

Payment &

Settlement

Agency Services & Custody

Others Asset Mgt.**

Retail Brokerage

•Including Municipal/Gov’t Finance and merchant banking. ** Mgt. = management


Joint Combination• Internal fraud( 內部詐欺 )

– 至少有一名公司內部人員參與，意圖詐取、侵占公司財產、規避法令或公司內部規範所導致的損失。

– e.g. 匿報交易 / 挪用公款 / 盜取盜用資產

• External fraud( 外部詐欺 )– 外部人員意圖詐取、侵占公司財產、規

避法令或公司內部規範所導致的損失。– e.g. 偽造 / 駭客攻擊

• Employment Practice & Workplace Safety ( 員工作業、工作場所安全 )– 因違反雇用、健康或安全規定及協議、

支付個人損害求償或差異性 / 歧視事件所導致的損失。

– e.g. 薪資 / 福利 / 所有歧視行為

• Clients, Products & Business Practices ( 客戶、產品、營運慣例 )– 非故意或疏忽而對特定客戶未盡專業義

務、或因產品特性及設計所導致之損失。– e.g. 強制性行銷 / 產品瑕疵 / 未依規對客

戶徵信

• Damage to Physical Assets ( 人員或資產損失 )– 因天然災害或其他事件所導致之實質資

產減損。

• Business Disruption & System Failures 　( 營運中斷與電腦當機 )– 因營運中斷與電腦當機所導致之損失。– e.g. 硬體 / 軟體 / 通訊 / 水電

• Business Disruption & System Failures 　( 執行運送及作業流程之管理 )– 與交易對手或賣方交易之處理不當或過

程管理疏失所導致之損失。– e.g. 錯帳 / 不精確的外部報告 / 與同業交

易處理不當 / 未經授權接觸資料

Pillar 1. (MRC)Minimum Required Capital

Pillar 2. Supervisory

Pillar 3. Disclosure

The 2001 New Basel Accord (including Operational Risk)

Definition of Operational RiskData Collection & Category

Basic Indicator Approach (BIA)

Advanced Measurement Approach (AMA)

Standardized Approach(SDA) Capital charge for

operational risk:-12% of MRC-17-20% of Gross income

Structure of Basel Ⅱ for “OpRisk”


Structure of Basel Ⅱ for“OpRisk”

%85.12)RisklOperationaRiskMarket(RiskCredit

Capital

2001 Basel , and Implement at 2006Ⅱ


Pillar 1. Basic Indicator Approach (BIA)

Where ：KBIA = the capital charge for OpRisk under the BIA

EI = the level of an exposure “indicator” for the whole institution, provisionally gross income

α = a fixed percentage, set by the BIS, relating the industry-wide level of required capital to the industry-wide level of the gross income.

α EIKBIA


Little Discussion about “Indicator”

• The indicator serves as a proxy for the scale of business operations and thus the likely scale of operational risk exposure within each of these business lines.

Indicator--Gross Income

Net interest income Net non-interest income

Fees & Commission

Net P&L from financial operation

Other income


Little Discussion about “α”

Where MRCj : Minimum Regulatory Capital for bank j EIj : Exposure indicator(gross income) for bank j

Capital charge for operational risk:-12%of MRC-17-20% of Gross income

j

jj EI

MRC

120.α

j :Bank

• α is estimated based on industry (Banking) data.


Pillar 1. Standardized Approach (SDA)

iii

TSA EIK β

8

1

Where ：KTSA = the capital charge under the SDAEIi = the level of an exposure “indicator” for each of the 8 business linesβi = a fixed percentage, set by the Committee,


Pillar 1. Standardized Approach (SDA)



Little Discussion about “β”

• β is estimated based on industry (Banking) data.

β The beta for bank for business line

MRC The Minimum Required Capital for bank

Business line weighting The weight of each business linei’s size over total business lines’ size.

j :Bank i : Business lines

lineessbutheforindicatorfinancial

weightinglineessbuMRCtotalcurrent

sin

](%)sin[]($)%[

12β

Capital charge for operational risk:-12%of MRC-17-20% of Gross income Operational Risk in BaselⅡ

An estimation result of β

Analysis of QIS* data: the Standardized Approach(Based on 12% of Minimum Regulatory Capital)

*QIS: Quantitative Impact StudyResources: Basel Committee on Banking Supervision, “Working Paper on Regulatory Treatment of Operational Risk,” September 2001.www.bis.org


Pillar 1. Advanced Measurement Approach (AMA)

• An internal operational risk system. • Not a standard approach yet.• Three broadly discussed approaches

– Internal Measurement Approach (IMA)– Loss Distribution Approach (LDA)– Scorecard Approach (SA)


Qualifying criteria and the relationship between approaches

• Before adapting a new approach, you must fulfill some criteria.

Standardized Approach(SDA)

Advanced Measurement Approaches (AMA)

Basic Indicator Approach(BIA)

Simple Complex

• Why do banks want to upgrade to “AMA” approach?


Ans: Incentive- from 12% to 8%

75% of the level of BIA and SDAIMA 75% x 12% =8%Capital charge for operational risk:

-12%of MRC


Internal Measurement Approach (IMA)

• Banks estimate operational risk capital based on measures of expected operational risk losses.

• IMA assumes a fixed and stable relationship between expected losses (the mean of the loss distribution) and unexpected losses (the tail of the loss distribution).

Operational Risk in Basel , AMAⅡ

Internal Measurement Approach (IMA)

Industry-Wide OpRisk Loss Distribution

0 E(L)Expected loss

U(L)Unexpected loss

Losses

Probabilityof loss

γ

Section1 Section2 Section3

γ: a factor which translates the expected loss (EL) into a capital charge.


1. Joint Combination : business line / loss type combination2. PE: The probability that an loss event occurs over some future horizon3. LGE: The loss given that an event 4. EI: a proxy for the size (or amount of risk) of each business line’s operational risk exposure.5. i : bank i 6. K : capital charge for OpRisk in each joint combination

How to measure EL(expected loss)?

iiii EILGEPEEL

γ ii ELK

Question : Is “γ” applicable for each bank ?


-RPI captures the difference in the risk profile of an individual bank.

Risk Profile Index (RPI)

Industry Dustribution-- RPI = 1.0

Case 1: fatter tale-- RPI > 1.0

Case 1: less fat tale-- RPI > 1.0

Loss Distribution Approach (LDA)

• Under LDA, banks estimate, for each business line/loss type combination, the likely distribution of operational risk losses over future horizon (for instance, one year).

• The capital charge is based on the simple sum of the VaR for each business line (and loss type).


Scorecard Approach (SA)

• An initial level of operational risk capital at the firm or business line level

• Modify these amounts over time on the basis of scorecards that attempt to capture the underlying risk profile and risk control environment of the various business lines.

• SA can reflect improvements in the risk control environment that will reduce both the frequency and severity of future operational risk losses.


The “floor”

• The committee will limit the reduction in capital held when a bank moves from SDA approach to IMA approach by setting a floor, below which the required capital cannot fall.

Pillar 2 : Supervisory Review Process

• Pillar 2 applies to all risks that a bank is facing.

• Four principles :– Principal 1 : A bank should build systems to

identify, measure, monitor and control its risks and maintain capital accordingly.

– Principles 2-4 : supervisors should assess the internal capital adequacy assessments and strategies in place and require remedial actions where these are inadequate.


Pillar 3. Disclosure


• Opposition to publication of operational data.





I n d e x

THE 10 PRINCIPLE

• BIS published “Sound Practices for the Management and Supervision of Operational Risk” on February 2003

• The document – Outlines a set of principles that provide a framework for

the effective management and supervision of operational risk.

– For use by banks and supervisory authorities when evaluating operational risk management policies and practices.

THE 10 PRINCIPLE

Developing An Risk Management Environment• Principle 1: Operational risks is a distinct risk

category that should be managed.• Principle 2: The bank’s operational risk

management framework is subject to effective and comprehensive internal audit.

• Principle 3:The framework should be consistently implemented throughout the whole banking organization

THE 10 PRINCIPLE

Risk Management• Principle 4: Banks should identify and assess the

operational risk inherent in all material products, activities, processes and systems.

• Principle 5: Banks should implement a process to regularly monitor operational risk profiles and material exposures to losses.

• Principle 6: Banks should have policies, processes and procedures to control and/or mitigate material operational risks.

• Principle 7: Banks should have in place contingency and business continuity plans.

THE 10 PRINCIPLE

Role of Supervisors• Principle 8: Banking supervisors should require

that all banks have an effective risk management framework.

• Principle 9:Supervisors should conduct regular evaluation of a bank’s operational risk management.

THE 10 PRINCIPLE

Role of Disclosure• Principle 10: Banks should make sufficient public

disclosure to allow market participants to assess their approach to operational risk management.

Rethink Operational Risk

Currently the industry seem to be working by analogy to market risk and credit risk,but…• Market & credit risks:

– Are accepted knowingly as part of the business decision.– Have a quantifiable size - Money lent,currency size, etc.– Have a reasonable amount of homogeneity– Have solid, long term historical data– Exhibit statistical properties that appear to be somewhat

stable across time

• Does operational risk exhibit any of these qualities?

Source:Credit Suisse Group Report http://www.bos.frb.org/bankinfo/conevent/oprisk/guldiman.pdf


Operational Risks exhibit numerous difficult properties:• Risks implicitly accepted as part of being in business

– Risks rarely chosen explicitly

• Risks are diverse by nature– It’s an all other category– Is there a link between customer lawsuits, rogue traders and operations

fails?

• Risks are highly context dependent & change rapidly– Are your business, people or processing systems similar to 10 years

ago?– Are the threats to those systems similar to 10 years ago?– How do you know when risks change (other than by judgment)– Is your estimate for Op Risk the same as pre 9/11?



Data Problem:



Control accidents can be separated into two types:• Individual, high frequency events can be better understood

and controlled through more quantitative techniques– Relatively high frequency; can develop fairly robust statistics

– Quantification and measurement can provide some valuable management tools

• Organizational accidents are difficult events to understand and control– Occur infrequently & are hard to predict or foresee

– Normally variety of contributing factors combine to cause the loss

– Each has its own individual pattern of cause and effect



Operational Risk is a different animal and

has to be treated differently

• Quantification Strategy• Prevention Strategy• Risk Mitigation Strategy

Quantification Strategy

Role for OpRisk Quantification

• Enables measurement of capital based on historical

experience of firm

• Improves bank decision making

• Provides a mechanism for better understanding “tail events,” those that may be outside a bank’s historical experience.

• Provides method for measuring the effect of risk mitigation tools.


Example:From Risk Information to Risk Capital

Source:Allianz Report http://www.bos.frb.org/bankinfo/conevent/oprisk/courage.pdf


What (Loss describing) Data to collect?

Knowledge System

Data Pool



Risk Map



From single Risks to aggregated Risks and VaR



Overall Distributions


Prevention Strategy

Focus resources on shrinking those “holes”


Prevention Strategy

Integrating old and new tools is the key to success• Internal control mechanism• Management Information System• Personnel education• Risk-aware corporate culture• External Audit• Etc…

Prevention Strategy

案例：理律破了哪些洞？• 未將新帝公司的轉匯戶頭，指定為在美國的新帝公司 • 未按月撰寫新帝公司對帳報告書，並藉此進行稽核 • 新帝公司的銀行存款戶與股票戶都交由劉偉杰管理• 未確實做好移交工作• 劉偉杰透過台北銀行等四家銀行，在八、九月進行鉅

額轉匯時，相關金融機構都有向調查局洗錢防制中心通報。但因理律的高知名度與權威，調查局當時研判，「程序並無不法情事」

資料來源：工商時報 2003/10/27

Risk Mitigation Strategy

Purpose of Risk Mitigation• Reducing loss when accidents happen

Tools for Risk Mitigation• Securitizaion• Insurance

• Business Continuity Plan


Risk Securitizaion:example• In 1998 Toyota* entered into a relationship with Gramercy P

lace Insurance Ltd as the special purpose vehicle for this transaction.

• Securitized a portion of Toyota’s auto lease residual risk for 1999,2000, and 2001 to protect against high losses on vehicles returned to Toyota at the end of full-term leases.

• A deductible totaling up to the first 9% of residual value will be paid by Toyota on resulting losses. Losses that exceed the deductible are split 90% / 10% between investors and Toyota,respectively.

• Notes issued in classes rated Aa2 / AA and Ba2/BB

Source:Goldman Sachs Report http://www.bos.frb.org/bankinfo/conevent/oprisk/wilder.pdf


Comparison with Operational Risk

Source:Goldman Sachs Report http://www.bos.frb.org/bankinfo/conevent/oprisk/wilder.pdf


Insurance seems to be the feasible tool

at this moment• Quantification techniques can provide firms with

the framework to determine appropriate insurance coverage.

• Related insurances include:– Directors & Officers Liability– Professional Liability– Assets Insurance– Etc…


Insurance and Basel II• Reduced overall level of the operational risk

capital charge partly to recognize the risk-mitigating effects of insurance.

• If explicit recognition of “robust and comprehensive insurance” is permitted, it should be limited to AMA.

• There should be a limit on the overall impact of insurance risk mitigation on the final capital amount.

Source :September 2001, Basel Committee on Banking Supervision, “Working Paper on the Regulatory Treatment of Operational Risk”


Insurance for Operational Risk: ExampleA number of shareholder class action suits are brought against a large commercial bank.Complaints assert that the bank engaged in numerous unlawful practices in order to increase profits, that the bank’s earnings had been overstated and were not prepared in accordance with GAAP, and that the bank failed to disclose a number of material events.

INSURANCE:Combined D&O, BPL, Pension Trust Liability, and Bond and Computer Crime policies.

SOLUTION:Combined suits were settled for $45 MM (excluding defense costs). The bank contributed the first $10 MM (policy deductible). Insurance paid the remaining $39MM.

Source:Marsh & McLennan Companies Report http://www.bos.frb.org/bankinfo/conevent/oprisk/mackay.pdf


Business Continuity PlansWhat is “BC Plan”?Advance arrangements and procedures that enable an organization to respond to an event in such a manner that critical business functions continue with planned levels of interruption or essential change.

The importance of BC Plan:According to Gartner Group survey, of the businesses that suffer a disaster and do not have a BC plan in place, 40% will fail within 18 months.


The Six Steps To Effective BC Planning • perform a Business Impact Analysis (BIA)• regular practice runs should be carried out• at what point should the plan be invoked? • strict guidelines to follow after the invocation• Location, location, location• People element

Source :SunGard Availability Services Reporthttp://www.cityoflondon.gov.uk/our_services/law_order/security_planning/bc_article_sungard_1.htm

我國金融機構作業風險管理現況

資料來源：財政部金融局與中華民國銀行工會新巴塞爾資本協定共同工作小組第一階段研究報告出版時間：民國九十二年六月調查對象： 52家本國銀行，但有 2家因情況特殊予以免答。


對作業風險資本計提規定之了解程度

6%16%

70%

8% 0%

完全了解大致了解尚可約略了解不了解


62%

34%

2% 2%

基本指標法標準法進階法尚未決定

2006 年底預計採用的資本計提方式


40%

6%34%

10%2% 8%

無規劃 2003年完成 2004年完成 2005年完成

2006年完成未定

作業風險損失資料庫之建置規劃


國內銀行業界作業風險管理發展情形問卷將發展情形分為以下 5 個階段第一階段：作業風險管理仍相當粗糙，尚未設立專職單位第二階段：開始意識到作業風險管理必須妥善管理，正逐步設立專

職單位並發展作業風險管理架構第三階段：開始對作業風險之各項「質性」指標進行追蹤及評估第四階段：開始發展作業風險管理量化模型第五階段：將作業風險管理充分融入企業風險管理中，將作業風險

衡量與信用風險、市場風險衡量加以整合


國內銀行業界作業風險管理發展情形

58%

42%

0%0%0%

第一階段第二階段第三階段第四階段第五階段


你發現了嗎你發現了嗎 !!!!

Operational Risk v.s. Our Career

5 5 個孩子其實就在你身邊個孩子其實就在你身邊 !!!!

Thank You for Your Attention!

• What is a lease residual? • Residual is the dollar amount that the bank guarantees your

new car will be worth at the end of the lease as long as you stay within the terms of the lease. At the end of the lease this is also the amount you would pay for the car if you wanted to purchase it, plus tax, license, doc & any other applicable fees. The residual is set by the bank and is a percentage of MSRP regardless of what the actual purchase price is. Residual is not negotiable as the bank is guaranteeing the value and therefore they set it. If at the end of the lease, you have stayed within the terms of the lease, if the car is worth more than the residual, you might want to buy it, sell it or trade it in. If however at lease end the value is less than the residual, you can give it back to the bank and not be responsible for anything (As long as you have stayed within the terms of the lease).


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