In
the era of deregulation of financial services and globalization,
coupled with the growing sophistication of technology,
various activities being undertaken by the banks are
becoming more and more diverse and multifarious.
The
fast changing banking products and services raise three
interrelated challenges for the banks - (i) remain market
leader and be responsive to the customers, (ii) keep
overall risk exposures within acceptable level and (iii)
evolve effective tools for greater and efficient control
over intrinsic risks inherent in the activities. If
various risks involved in the banking activities (new
as well as existing), which are mostly technology driven,
complex and intricate, are not properly controlled,
likelihood of loss may be extensive and the financial
health of the banking sector may not permit to sustain
such loss. The intention of a risk management system
and quantification of various inherent/underlying risks
is not to prohibit the banks from taking risks, but
to allow them to take risks commensurate with the returns
as well as their financial strength and their ability
to manage risks. Therefore, the risk management procedures
and systems must also encompass risk monitoring and
risk control apart from risk identification, and risk
measurement, which are essential prerequisite for a
robust risk management system.
Operational
Risk is the risk associated with human error, system
failures, and inadequate controls and procedures in
information systems or internal controls that will result
in losses. The Basel Committee on Banking Supervision
acknowledged that managing Operational Risk was becoming
an important feature of sound risk management practices
in modern financial markets. |
