1.2 What is Operational Risk and How is it Managed?

In the fast-paced world of finance, managing operational risk is crucial for the success and reputation of financial institutions. This blog post will provide a comprehensive overview of operational risk management, with a focus on the Three Lines Model proposed by the Institute of Internal Auditors (IIA).

Section 1: Understanding Operational Risk

- Operational risk encompasses a wide range of potential risks, including crisis management, risk management, and corporate social responsibility.

- The Basel Framework, which regulates the financial industry, initially focused on credit and market risks but later incorporated operational risk.

Section 2: The Impact of Information Technology

- The increasing reliance on information and system technology has significantly affected the management of operational risk in financial institutions.

- Specific areas, such as FinTech, pose unique challenges and expose financial institutions to greater operational and systems risk.

Section 3: The Three Lines Model

- The Three Lines Model, proposed by the IIA, provides a framework for organizing and managing operational risk within financial institutions.

- The first line of defense involves operational risk management at the business unit level.

- The second line of defense focuses on risk oversight and control functions, such as compliance and risk management departments.

- The third line of defense consists of internal audit, which provides independent assurance and evaluation of operational risk management.

Effectively managing operational risk is essential for financial institutions to maintain their reputation, protect against potential crises, and ensure compliance with regulatory requirements. By implementing the Three Lines Model and staying vigilant in identifying and mitigating operational risks, financial institutions can navigate the complex landscape of operational risk management successfully.

Download Slide

1.1 Introduction - Welcome to the Course Operational Risk Management- Fr...

Course Operational Risk Management- Frameworks & Strategies

1.1 Introduction - Welcome to the Course Operational Risk Management- Frameworks & Strategies

By the end of this Specialization, you will be able to: 

• Gain a solid foundation of the complete risk management process. 

• Understand the concepts and principles of credit risk management and the steps to manage portfolio credit risks. 

• Use statistical models to measure risk associated with different types of asset classes. 

• Build an operational risk assessment program. 

These risks come in many forms and can cause losses that can be insignificantly small or large enough to destroy an institution almost overnight. The methods and strategies for managing operas conclude, by measuring past risks and if possible, mitigating or hedging them if not, allocating risk capital to cover potential losses. 

In this course, we'll explore the different categories and sources of operational risk and identify causal relationships and financial business processes. 

You'll learn how to use risk and control self-assessments (RCSA) to create key risk indicators (KRI) that will allow you to measure and manage operas. 

You'll also learn how to use scenario analysis to model risk in situations where data is scarce. Lastly, you'll look at how operational risk capital is budgeted and allocated to business units.