Risk in Operations Management Lecture Review

These flashcards cover key concepts from the lecture on operational risk management, focusing on definitions, regulatory frameworks, and key topics outlined in the course.

What is the definition of operational risk according to the Basel II framework?

Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people, and systems or from external events.

What are the four causes of operational risk as per the deconstruction of its definition?

The four causes are inadequate or failed processes, inadequate or failed people, inadequate or failed systems, and external events.

What are the two primary differences between operational risk and market/credit risk?

Operational risk is not directly taken in return for an expected reward and exists in the natural course of corporate activity.

List four examples of operational risk from recent headlines.

Examples include the Credit Suisse Archegos scandal, the Australian Banking scandal, the DNB Bank ASA Anti-Money Laundering Scandal, and COVID-19 Pandemic.

What is the primary mission of the Bank of International Settlements (BIS)?

To support central banks’ pursuit of monetary and financial stability through international cooperation.

What are the three pillars of Basel II?

Minimum capital requirements, supervisory review process, and market discipline.

What are the five key regulatory requirements for operational risk management?

Identifying, assessing, monitoring and controlling, mitigating operational risks, and calculating capital to protect from operational risk losses.

What are the seven categories of operational risk?

1. Internal Fraud 2. External Fraud 3. Employment Practices and Workplace Safety 4. Clients, Products, and Business Practices 5. Damage to Physical Assets 6. Business Disruption and System Failures 7. Execution, Delivery, and Process Management.

What is the purpose of Dodd-Frank Act, 2009?

To promote the financial stability of the United States by improving accountability and transparency in the financial system.

What operational risk capital calculation methods does Basel II Pillar 1 offer?

1. Basic Indicator Approach (BIA) 2. The Standardized Approach (TSA) 3. Advanced Measurement Approach (AMA).

What were the problems with Basel I?

Basel I did not adequately capture the risks of increasingly complex financial markets, allowing banks to manipulate their portfolios.

What does the Dodd-Frank Act establish regarding large financial firms?

It creates a safe way to liquidate failed financial firms and imposes new capital and leverage requirements to prevent them from becoming too big to fail.

What role does internal loss data play in operational risk management?

Internal loss data is one of the key data elements used in an operational risk framework for identifying and assessing risks.