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FRM 10-Saunders CH17 Accessible-New

Chapter 17 discusses various sources of operational risk, including technology, employees, customer relationships, capital assets, and external factors. It highlights how efficient technology can lower costs and increase revenues, while also summarizing specific risks associated with each source. Additionally, the chapter outlines strategies for controlling operational risk through loss prevention, control, financing, and insulation.

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13 views10 pages

FRM 10-Saunders CH17 Accessible-New

Chapter 17 discusses various sources of operational risk, including technology, employees, customer relationships, capital assets, and external factors. It highlights how efficient technology can lower costs and increase revenues, while also summarizing specific risks associated with each source. Additionally, the chapter outlines strategies for controlling operational risk through loss prevention, control, financing, and insulation.

Uploaded by

zhousuying
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 17

Technology and Other Operational


Risks

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Overview
• Sources of Operational Risk

© McGraw-Hill Education. 17-2


Sources of Operational Risk

• Technology
• Employees
• Customer relationships
• Capital assets
• External

© McGraw-Hill Education. 17-3


Technology and Profitability
• Efficient technological base can result in:
– Lower costs
 Through improved allocation of inputs
– Increased revenues
 Through wider range of outputs
Earnings before taxes = (Interest
income - Interest expense) +
(Noninterest income - Noninterest
expense) - Provision for loan losses

© McGraw-Hill Education. 17-4


Impact of Technology (1 of 2)
• Interest income can increase
– Through offering wider array of
services/products (i.e., outputs) or cross-
selling
• Interest expense can decrease
– Through improved access to markets for
liabilities
 Fedwire, CHIPS

© McGraw-Hill Education. 17-5


Impact of Technology (2 of 2)
• Other income can increase
– Through electronic handling of fee generating
OBS activities such as LCs and derivatives
• Noninterest expenses can be reduced
– Through improved efficiency of back office
operations using technology
 Especially true for securities-related activities

© McGraw-Hill Education. 17-6


Summary of Operational Risks
(1 of 2)
Source of Risk Specific Problem
Employee risk Employee turnover
Key personnel risk
Fraud risk
Error
Rogue trading
Money laundering
Confidentiality breach
Technology risk Programming error
Model risk
Mark-to-market error
Management information
IT systems outage
Telecommunications failure
Technology provider failure
Contingency planning

© McGraw-Hill Education. 17-7


Summary of Operational Risks
(2 of 2)
Source of Risk Specific Problem
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

© McGraw-Hill Education. 17-8


Controlling Operational Risk

• Loss prevention:
– Training, development, and review of
employees
• Loss control:
– Planning, organization, back-up
• Loss financing:
– External insurance
• Loss insulation:
– FI capital

© McGraw-Hill Education. 17-9


End of Presentation

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 17-10

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