OPERATIONAL RISKS

Managing Operational Risks in Financial Institutions



Managing Operational Risks in Financial Institutions

Introduction

The study is related to the Alpha Delt which is a multinational bank whose main focus on the personal financial products. It is observed that the bank officials are involved in the fraud due to which the bank has survived. Moreover, it is found that the senior bank officials are involved in this fraud mainly the Mark Huges. This fraud has led the Alpha Delt towards the operating risk which has adversely affected the bank.

Operational risk

Operational risk concerns the investigation of four significant risks of a loss to a firm or portfolio: market risk, credit risk, liquidity risk, and operational risk (glimpse Jarrow and Turnbull, 2000, p. 587). Market risk includes the risk of a loss due to unanticipated price movements in financial securities or asset values, and it encompasses price fluctuations due to either equities, interest rates, products, or foreign currencies. Credit risk is the risk of a decrease due to default, and liquidity risk is the risk of a decrease due to the inability to liquidate an asset or economic position at a sensible cost in a sensible time period. And, according to the revised Basel Committee modified report “operational risk is defined as the risk of decrease producing from the insufficient or failed interior processes, persons and schemes or from external events. This definition includes legal risk”. Furthermore, “legal risk includes, but is not restricted to, exposure to penalties, penalties, or punitive damages producing from supervisory activities, as well as personal settlements”.

Operating Risks Associated With Alpha Delt

The operational risk which is associated is with Alpha Delt are the risk of direct or indirect losses caused by errors or imperfections in the processes and systems in Alpha Delt, human error or lack of qualified personnel in the organization or unfavorable external events of non-financial nature, such as fraud. Accordingly, operational risks for the Alpha Delt can be classified as follows;

- The risk of personnel; the risk of losses associated with possible errors of staff, fraud, lack of qualified staff instability of the organization, the possibility of adverse changes in labor laws, etc.

- Process risk; the risk of loss associated with errors in the process of conducting operations and calculations on them, their accounting, reporting, pricing, etc. (Jane, 2008, 87)

- Technology risk; the risk of losses due to imperfections in the technology used; lack of capacity systems, the inadequacy of their transactions, robustness and data processing methods or poor quality or inadequate data used, etc. (Groppelli and Ehsan, 2006, 99)

- Risks environment; the risks of losses related to non-financial changes in the environment in which it operates, changes in legislation, policy changes, changes in the tax system, etc. (John, 1996, 13)

- Risks of physical intervention; the risk of loss associated with direct physical interference with the activities of the organization; natural disasters, fire, robbery, terrorism, etc.

Investment risk

Operating risks associated with Alpha Delt also include the investment risk; it describes the possibility of financial losses in the ...