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Banks should plan for organizational controls in order
to lessen risks which result from their day-to-day operations.
These controls have to be embedded in the organizational
processes to mitigate risks. Regulators across the world
have issued necessary guidelines for implementing these
controls in the light of Basel II framework for operational
risks. Operational risk management framework consists of
two distinct factors, namely, qualitative and quantitative
frameworks. The qualitative framework primarily consists
of the best practices and controls for mitigating operational
risks, whereas the quantitative frameworks deals with the
data loss mechanism and associated capital computation for
operational risks.
The first step towards robust governance framework is to
have documented Governance Manual and a well-established
governance framework with policies, procedures and internal
control mechanisms which cover all areas of business operations.
Banks must have strong governance arrangements, which include
a clear organizational structure with clear, transparent
and dependable lines of accountability. They also have effective
processes to identify, manage, monitor and report risks
that it is exposed to, and internal control mechanisms,
including sound administrative and accounting procedures
and effective control and safeguard arrangements for information
processing systems.
The Board of Directors should give proper guidance to the
senior management in conducting business operations of the
banks. All the policies and procedures should be approved
by the board. Various board and management committees have
to be established for effective decision-making and supervision.The banks should establish independent audit mechanism
for validating internal controls and identifying the issues.
They should have effective processes in place for the identifying,
assessing, monitoring and reporting the risks in business/functional
activities. These processes and mechanisms have to be comprehensive,
relevant and proportionate to the nature, scale and complexity
of the activities of the bank.
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