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RBI’s OPERATIONAL RISK NORMS
Why in the News?
Recently, RBI has expanded its oversight to include more lenders like NBFCs and co-operative banks in its updated guidance note on operational risk management structure.
More on News
- It is in line with the Basel Committee on Banking Supervision (BCBS).
- The BCBS believed that additional measures were needed to enhance banks’ resilience against operational risks.
- Prioritising risk management strengthens a Regulated Entity’s sustainability and maintains crucial operations during disruptions while bolstering the financial system.
Basel Committee on Banking Supervision
- It is a global committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.
- Its primary mandate is to enhance the stability of the international banking system by formulating standards and guidelines for banking supervision.
- The Basel Committee on Banking Supervision consists of 45 members, including central banks and bank supervisors from 28 jurisdictions worldwide.
Types of Operational Risks
As per BCBS,
- Internal Fraud: Misappropriation of assets, manipulation of data, or fraudulent activities by employees or internal parties.
- External fraud: Fraudulent activities committed by third parties, such as robbery, forgery, and hacking.
- Business Disruption and System Failures: Disruptions to business operations, IT systems, or critical infrastructure, leading to service interruptions, data breaches, or financial losses.
- Damage to physical assets: Losses due to damage to physical assets from natural disasters, terrorism, or vandalism.
- Regulatory Compliance: Breaches of laws, regulations, or industry standards, resulting in fines, penalties, or legal actions.
Three Lines of Defence Model
- Operational management functions responsible for identifying, assessing, and managing risks at the operational level.
- Front-line employees directly manage risks in their daily operations.
- Independent risk management and compliance functions that oversee and support the first line by establishing policies, procedures, and controls.
- Ensuring the fulfilment of all Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) duties.
- Internal audit function, providing independent assurance and evaluation of the effectiveness of risk management and internal controls.
- This model helps ensure effective risk management, accountability, and governance within the financial institutions.