Journal of Operational Risk

Quantification of regulatory capital for management of operational risk in banks: study from an emerging market economy

K. Naveen Kumar and Prosun Chatterjee

  • The paper identifies loss event types that are more frequent and severe in the banking operations.
  • Study categorizes the bank branches based on the risk profile and identifying the key risk indicators (KRIs).
  • The empirical evidence on the loss event (LE) analysis finds that major loss events are reported from internal and external frauds and failures in execution, delivery and process management.
  • According to RCSA assessment, bank has failed to enter the primary security value in core-banking systems, errors in account opening, security of ATM machine and so on.
  • Paper analyses the operational risk capital charge (ORCC) under TSA and BIA method.
  • RCSA exercise and the assessment of Risk Product, Control Design Effectiveness and Control Operating Effectiveness served as an indicator for identification of KRIs.

Operational risk is inherent in all banking products, activities, processes and systems. India’s banking sector has experienced a paradigm shift due to globalization and deregulation, which has led to the wider use of technology in product distribution channels and banks’ service delivery mechanisms. As a result, banks have become exposed to various types of operational risks, and the impact on the banking industry has been complex, diverse and catastrophic. This paper studies the various methodologies used by an Indian bank in its operational risk management activities: these include loss database analysis, risk control self-assessment and key risk indicator (KRI) identification. The study is based on both primary and secondary data on a public sector bank in India. This paper helps to identify which loss event types are more frequent and severe and shows how to categorize bank branches based on their risk profiles and KRIs.

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