RSK4801 Assignment 1
Suggested Solutions
Assignment 01
Operational Risk Management
RSK 4801
Department of Finance, Risk Management and Banking
This tutorial letter contains important information about your module.
You have been appointed since the beginning of January as the Operational Risk Manager for
Benchmark Bank. In your first discussion with the Chief Risk Officer (CRO), she raised a concern that the risks are not properly classified by the business units and that she is uncomfortable with the accuracy of the loss reporting.
The CRO specifically requested you to analyse the reported losses and where necessary, correct the information to reflect the losses more accurately for the annual report. You obtained the current
Loss Register and noticed that it is in a dire state. You decided to correct the Loss Register by following the following steps in a table format:
Classify the losses according to the main risk types
Classify operational risk losses according to the operational risk sub-types
Convert foreign currency into South African Rand
Add the amounts to determine the frequency and total loss per risk category
Answer
The purpose of this assignment was to give students the opportunity to classify risks in terms of the risk definitions and to demonstrate how difficult it sometimes is to classify risks, as the consequence of the event can caused by a number of different factors. In practice, this is known as the boundary effect. Although it may appear to be trivial, the impact on the profitability of a department or division can be impacted significantly due to loss events. Banks also have to calculate regulatory capital and for operational risk capital, loss experience is one of the factors considered to calculate the capital. The incorrect classification of risk can therefore have a significant impact on a department or division, both from a profitability and regulatory capital aspect.
Below is the suggested solution for the classification of the events.
Assignment 01
Operational Risk Management
RSK 4801
Department of Finance, Risk Management and Banking
This tutorial letter contains important information about your module.
You have been appointed since the beginning of January as the Operational Risk Manager for
Benchmark Bank. In your first discussion with the Chief Risk Officer (CRO), she raised a concern that the risks are not properly classified by the business units and that she is uncomfortable with the accuracy of the loss reporting.
The CRO specifically requested you to analyse the reported losses and where necessary, correct the information to reflect the losses more accurately for the annual report. You obtained the current
Loss Register and noticed that it is in a dire state. You decided to correct the Loss Register by following the following steps in a table format:
Classify the losses according to the main risk types
Classify operational risk losses according to the operational risk sub-types
Convert foreign currency into South African Rand
Add the amounts to determine the frequency and total loss per risk category
Answer
The purpose of this assignment was to give students the opportunity to classify risks in terms of the risk definitions and to demonstrate how difficult it sometimes is to classify risks, as the consequence of the event can caused by a number of different factors. In practice, this is known as the boundary effect. Although it may appear to be trivial, the impact on the profitability of a department or division can be impacted significantly due to loss events. Banks also have to calculate regulatory capital and for operational risk capital, loss experience is one of the factors considered to calculate the capital. The incorrect classification of risk can therefore have a significant impact on a department or division, both from a profitability and regulatory capital aspect.
Below is the suggested solution for the classification of the events.
References: Blunden, T. Thirlwell, J. 2013. 2nd Edition. Mastering Operational Risk. Harlow Pearson Education Ltd. Young, J. 2006. Operational Risk Management: The practical application of a qualitative approach