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Professional Risk Managers International Association

PRMIA Global Event SeriesThe PRMIA Global Event Series provides focused examinations of current risk issues, each related to a single key theme. Each series includes events throughout the PRMIA global network as well as a survey of our members on a designated theme. September 2008 SeriesOp

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Professional Risk Managers International Association

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    1. Professional Risk Managers’ International Association Global Event Series September 2008 Operational Risk & Capital Allocation

    2. PRMIA Global Event Series The PRMIA Global Event Series provides focused examinations of current risk issues, each related to a single key theme. Each series includes events throughout the PRMIA global network as well as a survey of our members on a designated theme. September 2008 Series Operational Risk and Capital Allocation is the focus of the September series, an area with perhaps the largest potential for impact on any organization. Reputations, human capital, quality control, supply chain management, terrorism, bio-hazards, continuity planning, systems and project management and more will be covered Operational Risk Survey “Operational Risk – A Status Check on Global Practices”, will provide a valuable assessment of current operational risk practices. The questions in this survey were written as if they were to be answered by a risk practitioner at a user organization; consultants and regulators were instructed that they could either skip a question, or respond from the perspective of their typical/primary company relationships. In total, over 1,100 PRMIA members participated in the survey. As noted, not all respondents answered all questions.

    3. Acknowledgements Nawal Roy PRMIA would like to extend special acknowledgement to Nawal Roy for his assistance in reviewing and structuring the survey questions and reviewing the content of this report. Nawal Roy is a Managing Partner of Shobhit Capital Group, an independent advisory firm. Ernst & Young PRMIA would like to extend thanks to Ernst & Young for underwriting this survey. Global Event Series Advisory Committee PRMIA would like to thank the Global Event Series Advisory Committee for their assistance in identifying the questions for this survey. The biography of special contributor Nawal Roy is provided at the end of the presentation, along with a list of the Advisory Committee members.

    4. Key Findings Although organizational structures continue to differ globally, there is a consistent trend of operational risk departments reporting under the Chief Risk Officer’s purview. Although significant progress in operational risk frameworks has been made, the emphasis on capital calculation was reported as the least significant central operational risk department responsibility, regardless of company size. Companies continue to be primarily focused on developing risk strategies and improved risk reporting. An optimistic trend is that operational risk departments appear to be gaining visibility and access to both audit and risk committees, with the majority meeting on either a monthly or quarterly basis. Greater scrutiny at the board level may be responsible for this trend. Respondents from larger organizations appear to have greater confidence that their operational risk frameworks are effective as compared to smaller companies.

    5. Key Findings (cont.) Globally, respondents consistently indicated that a formalized operational risk appetite has not been developed. While not surprising, this will likely continue to be a focus item over the next year as both internal and external stakeholder expectations increase. While capital calculation methodologies are still developing, there seems to be a clear preference toward using hybrid approaches that incorporate a variety of data elements to calculate operational risk capital. Although the majority of respondents indicated that they do not use external losses to measure exposure, many respondents also indicated that external losses are a significant part of their scenario analysis methodology. Surprisingly, 44% of the largest organizations (large companies and multinationals) indicated that they have no plans to use operational risk capital in performance management.

    6. My role in the risk profession is:

    7. Regional Breakdown

    8. Size of Organization Relative to other companies in your country, how would you describe the size of your organization?

    9. Primary Responsibility What is your primary responsibility in your organization?

    10. Reporting To whom does the operational risk department report? It needs to be clear about the phrase “ board members stated their Op Risk department”. It needs to be clear about the phrase “ board members stated their Op Risk department”.

    11. Central Operational Risk Department Responsibilities Please rank the following responsibilities in terms of their relative significance to the central operational risk department in your organization. Please select 'N/A' if the role is not performed.

    12. Reporting How often does the operational risk head report to the Audit or Risk Committee of the Board? Very good slide. Very insightful.Very good slide. Very insightful.

    13. Internal Control Environment How would you rate the overall internal control environment of your firm with regards to addressing operational risk?

    14. Operational Risk Framework How would you rate the robustness of the operational risk framework in identifying, assessing and measuring the overall operational risk of the firm? Very insightful again.Very insightful again.

    15. Risk Appetite Does your organization have a formalized risk appetite (or risk tolerance) articulated for operational risk?

    16. Calculation Methodology What operational risk capital calculation methodology does your firm employ?

    17. Measurement Methodology What are the key inputs into your operational risk measurement methodology? (Select all that apply)

    18. External Loss Data How do you make use of external loss data within your measurement approach?

    19. Internal Loss Data What internal loss data does your firm collect?

    20. Risk Exposure Does your firm use external losses to help measure its operational risk exposure?

    21. Key Risk Indicators How often are Key Risk Indicators (KRIs) reviewed for risk sensitivity and coverage of risk profile?

    22. Responsiveness of Business How responsive is business to the operational risk department?

    23. Reporting of Operational Risk Components In order of importance to the recipients, rank the following operational risk reporting components with respect to business unit-level reporting (1 being the lowest importance and 5 being the highest importance):

    24. Reporting of KRIs When reporting on KRIs, which of the following characteristics are reported to business unit (select all that apply)?

    25. Mitigation/Monitoring How does your operational risk management unit get involved in the mitigation/monitoring of operational risk within the business lines?

    26. Internal Processes and Activities Which of the following organizations conduct audits of your company’s internal process documentation and actual internal activities (select all that apply)?

    27. Economic Capital Methodology Do you incorporate your operational risk capital calculation into your firms economic capital methodology?

    28. Performance Measurement Are there plans to use allocation of operational risk capital in performance management?

    29. Allocation of Operational Risk Capital At what level is the operational risk capital allocated?

    30. Indian context Committee on Financial Sector Assessment set up in Sep2006 expected to submit its Report this year to: Identify appropriate areas, techniques and methodologies in the Hand Book on Financial Sector Assessment (IMF &WB) and also any other pertinent documents for financial sector assessment relevant in the current and evolving context of the Indian financial sector; Comprehensive and objective assessment of the financial sector Analyse specific development and stability issues relevant to India Based on 3 pillars: financial stability assessment and stress testing; Legal, infrastructural and market development issues’ Assessment and status of implementation of International standards Board of Financial Supervision strengthened to include supervision of financial conglomerates Compliance function strengthened with an effective oversight Fraud Monitoring Reporting System made more effective with its reporting to Fraud Monitoring Committee of the RBI Credit Card entities put on rigorous discipline following complaints of indiscriminate issue and harassment by customers. Provisioning norms revised across the sectors to reckon the OR

    31. Global Event Series Advisory Committee Chris Chaloner, Head of Group Risk, Man Group plc Anthony Coleman, Chief Risk Officer and Group Actuary, Insurance Australia Group Edward Dumas, SVP & Director Global Treasury Risk Management, State Street Duncan Holmes, Director of FINEX, Financial Institutions, Willis Limited Michael Jones, Director of Analytics, The Energy Authority Guan Khoo Head, Group Risk (Models Validation), Standard Chartered Bank Jurgen Kruger, Head of Risk Management, Concordia Advisors Pierre-Yves Moix, Chief Risk Officer, RMF Investment Management Artur Pustelnik, Head of Risk Controlling, Deutsche Bank Polska S.A. Lori Ramos-Marilla, Global Director Quantitative Research & Modeling, Platts Robert R Reitano, Professor of the Practice in Finance, Brandeis University, International Business School Bill Savage, AVP Operational Risk Management, The Hartford Navin Sharma, Vice President, Director Risk Management, OppenheimerFunds, Inc. Kalyan Sunderam, Chief Risk Officer & Deputy CEO, Bahraini Saudi Bank Gerard Trevino, Chief Operating Officer/Chief Risk Officer, AAA Capital Management Advisors, Ltd.

    32. Special Contributor Nawal Roy Nawal Roy is Managing Partner of Shobhit Capital Group, an independent advisory firm. Before Shobhit Capital, Mr. Roy was a Vice President in Moody’s Investor Services as a risk management specialist. He was involved in rating a wide variety of financial firms and derivative products. In addition, he was a specialist on valuation and risk management for hedge fund rating team. Before joining Moody's in January 2006, Nawal was at KPMG Financial Risk Management Practice in New York City. Prior to consulting at KPMG, Nawal has spent time as trading strategist and global risk manager at Credit Suisse First Boston and Deutsche Bank. Nawal is one of the founding directors of PRMIA, an international risk management association. He was one of the directors of the Interim Board of PRMIA and regional director of the New York Chapter. Now, he is an active member of the Education and Standards Committee of PRMIA. Nawal holds dual masters (MA in Economics and MS in Quantitative Finance) from University of Cincinnati, Ohio. In addition, Nawal has a MA (majoring in Econometrics and Mathematical Economics) and BA (majoring in Economics and Statistics) from University of Bombay, India.

    33. Professional Risk Managers’ International Association Global Event Series 13th September 2008 Operational Risk & Capital Allocation B. Yerram Raju Regional Director, Hyderabad

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