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Managing Operational Risk in Financial Institutions
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Question 1 of 10
1. Question
In a bit to determine whether a bank has in place a sound firm-wide risk management framework that enables it to define its risk appetite and recognise all material risks, what should Supervisors consider? (Select all that applies)
Correct
Supervisors should determine whether a bank has in place a sound firm-wide risk management framework that enables it to define its risk appetite and recognise all material risks, including the risks posed by concentrations, securitisation, off-balance sheet exposures, valuation practices and other risk exposures. The bank can achieve this by:
adequately identifying, measuring, monitoring, controlling and mitigating these risks;
clearly communicating the extent and depth of these risks in an easily understandable, but accurate, manner in reports to senior management and the board of directors, as well as in published financial reports;
conducting ongoing stress testing to identify potential losses and liquidity needs under adverse circumstances; and
setting adequate minimum internal standards for allowances or liabilities for losses, capital, and contingency funding.
Incorrect
Supervisors should determine whether a bank has in place a sound firm-wide risk management framework that enables it to define its risk appetite and recognise all material risks, including the risks posed by concentrations, securitisation, off-balance sheet exposures, valuation practices and other risk exposures. The bank can achieve this by:
adequately identifying, measuring, monitoring, controlling and mitigating these risks;
clearly communicating the extent and depth of these risks in an easily understandable, but accurate, manner in reports to senior management and the board of directors, as well as in published financial reports;
conducting ongoing stress testing to identify potential losses and liquidity needs under adverse circumstances; and
setting adequate minimum internal standards for allowances or liabilities for losses, capital, and contingency funding.
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Question 2 of 10
2. Question
A sound risk management system should have the following key features except
Correct
A sound risk management system should have the following key features:
active board and senior management oversight;
appropriate policies, procedures and limits;
comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;
appropriate management information systems (MIS) at the business and firm-wide level; and
comprehensive internal controls.Incorrect
A sound risk management system should have the following key features:
active board and senior management oversight;
appropriate policies, procedures and limits;
comprehensive and timely identification, measurement, mitigation, controlling, monitoring and reporting of risks;
appropriate management information systems (MIS) at the business and firm-wide level; and
comprehensive internal controls. -
Question 3 of 10
3. Question
Whose responsibility is to define the institution’s risk appetite and to ensure that the bank’s risk management framework includes detailed policies that set specific firm-wide prudential limits on the bank’s activities?
Correct
It is the responsibility of the board of directors and senior management2 to define the institution’s risk appetite and to ensure that the bank’s risk management framework includes detailed policies that set specific firm-wide prudential limits on the bank’s activities, which are consistent with its risk-taking appetite and capacity. In order to determine the overall risk appetite, the board and senior management must first have an understanding of risk exposures on a firm-wide basis. To achieve this understanding, the appropriate members of senior management must bring together the perspectives of the key business and control functions.
Incorrect
It is the responsibility of the board of directors and senior management2 to define the institution’s risk appetite and to ensure that the bank’s risk management framework includes detailed policies that set specific firm-wide prudential limits on the bank’s activities, which are consistent with its risk-taking appetite and capacity. In order to determine the overall risk appetite, the board and senior management must first have an understanding of risk exposures on a firm-wide basis. To achieve this understanding, the appropriate members of senior management must bring together the perspectives of the key business and control functions.
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Question 4 of 10
4. Question
A bank’s policies, procedures and limits should include the following except
Correct
A bank’s policies, procedures and limits should:
provide for adequate and timely identification, measurement, monitoring, control and mitigation of the risks posed by its lending, investing, trading, securitisation, off-balance-sheet, fiduciary and other significant activities at the business line and firm-wide levels;
ensure that the economic substance of a bank’s risk exposures, including reputational risk and valuation uncertainty, are fully recognised and incorporated into the bank’s risk management processes;
be consistent with the bank’s stated goals and objectives, as well as its overall financial strength;
clearly delineate accountability and lines of authority across the bank’s various business activities, and ensure there is a clear separation between business lines and the risk function;
escalate and address breaches of internal position limits;
provide for the review of new businesses and products by bringing together all relevant risk management, control and business lines to ensure that the bank is able to manage and control the activity prior to it being initiated; and
include a schedule and process for reviewing the policies, procedures and limits and for updating them as appropriate.Incorrect
A bank’s policies, procedures and limits should:
provide for adequate and timely identification, measurement, monitoring, control and mitigation of the risks posed by its lending, investing, trading, securitisation, off-balance-sheet, fiduciary and other significant activities at the business line and firm-wide levels;
ensure that the economic substance of a bank’s risk exposures, including reputational risk and valuation uncertainty, are fully recognised and incorporated into the bank’s risk management processes;
be consistent with the bank’s stated goals and objectives, as well as its overall financial strength;
clearly delineate accountability and lines of authority across the bank’s various business activities, and ensure there is a clear separation between business lines and the risk function;
escalate and address breaches of internal position limits;
provide for the review of new businesses and products by bringing together all relevant risk management, control and business lines to ensure that the bank is able to manage and control the activity prior to it being initiated; and
include a schedule and process for reviewing the policies, procedures and limits and for updating them as appropriate. -
Question 5 of 10
5. Question
The key elements necessary for the aggregation of risks are an appropriate infrastructure and management information system which execute the following (Select all that applies)
Correct
The key elements necessary for the aggregation of risks are an appropriate infrastructure and MIS that:
allow for the aggregation of exposures and risk measures across business lines
support customised identification of concentrations.Incorrect
The key elements necessary for the aggregation of risks are an appropriate infrastructure and MIS that:
allow for the aggregation of exposures and risk measures across business lines
support customised identification of concentrations. -
Question 6 of 10
6. Question
The following are the basic principles of corporate governance except
Correct
The basic principles of corporate governance are:
Rights and Equitable Treatment of Shareholders: The shareholders of an organization have certain fundamental rights and privileges which an organization must do their very best uphold and protect without any form of restriction whatsoever (Such rights include but not limited to: right to receive notice of annual general meeting, attend them and vote; rights to receive their share of the organization’s profit or loss; rights to receive consolidated annual reports and accounts of the organization; rights to audit or inspect the statutory books of the organization etc.).
The interest of Stakeholders: Stakeholders are those individuals or groups that have an interest in an organization and whose organizational activities are likely to affect them. Such individuals or groups include shareholders who are concerned with the profit of an organization; employees who are interested in their job safety and payment of wages as at when due; government who are interested in tax payment; creditors who wants their money to be paid as at when due, depositors who want safety for their deposits etc.
Roles and Responsibilities of the Board of Directors: The board of directors is the highest decision-making organ of an organization. Their roles and responsibilities include: ensuring that proper books of accounts are kept and maintained in an organization; that there are effective communications among the various stakeholders; maintain an effective system of internal control; determine and set appropriate strategy that an organization needs to pursue and how to achieve them; they are to ensure that the activities of the organization are well-aimed at influencing its profitability while meeting the needs of the various stakeholders; the board of directors are also expected to deal with those issues that relate with corporate governance and risk etc.Incorrect
The basic principles of corporate governance are:
Rights and Equitable Treatment of Shareholders: The shareholders of an organization have certain fundamental rights and privileges which an organization must do their very best uphold and protect without any form of restriction whatsoever (Such rights include but not limited to: right to receive notice of annual general meeting, attend them and vote; rights to receive their share of the organization’s profit or loss; rights to receive consolidated annual reports and accounts of the organization; rights to audit or inspect the statutory books of the organization etc.).
The interest of Stakeholders: Stakeholders are those individuals or groups that have an interest in an organization and whose organizational activities are likely to affect them. Such individuals or groups include shareholders who are concerned with the profit of an organization; employees who are interested in their job safety and payment of wages as at when due; government who are interested in tax payment; creditors who wants their money to be paid as at when due, depositors who want safety for their deposits etc.
Roles and Responsibilities of the Board of Directors: The board of directors is the highest decision-making organ of an organization. Their roles and responsibilities include: ensuring that proper books of accounts are kept and maintained in an organization; that there are effective communications among the various stakeholders; maintain an effective system of internal control; determine and set appropriate strategy that an organization needs to pursue and how to achieve them; they are to ensure that the activities of the organization are well-aimed at influencing its profitability while meeting the needs of the various stakeholders; the board of directors are also expected to deal with those issues that relate with corporate governance and risk etc. -
Question 7 of 10
7. Question
To improve Risk culture of an organisation, what are the key indicators to be considered? (Select all that applies)
Correct
To improve Risk culture of an organisation, employee behaviour should be monitored for new trends, attitudes or perceptions requiring attention. Track quantitative and qualitative measures of an effective risk culture using indicators such as:
Level of executive management sponsorship
Line of business ownership of risk management
Effectiveness of risk committee and governance processes
Evidence of key business decisions, taking risk and solvency into consideration
Quality of Board discussions on risk issues and escalated matters
Use of risk appetite statement and tolerances in decision making
Alignment and incorporation of risk into strategic planning and directionIncorrect
To improve Risk culture of an organisation, employee behaviour should be monitored for new trends, attitudes or perceptions requiring attention. Track quantitative and qualitative measures of an effective risk culture using indicators such as:
Level of executive management sponsorship
Line of business ownership of risk management
Effectiveness of risk committee and governance processes
Evidence of key business decisions, taking risk and solvency into consideration
Quality of Board discussions on risk issues and escalated matters
Use of risk appetite statement and tolerances in decision making
Alignment and incorporation of risk into strategic planning and direction -
Question 8 of 10
8. Question
What are the key elements of creating and maintaining a good risk culture?
Correct
Key elements to creating and maintaining a good risk culture are
Risk and risk management must be understood by all of your staff. They cannot have a strong culture around what they do not understand. Also read: What does it take to be a Risk Manager?
The risk management framework must be aligned as a business enabler, not a hindrance
The risk management process must be efficient and not cumbersome
Risk management should be simple and easy to understand. It should be kept “real”
Good behaviour and actions should be recognised and rewarded. Bad behaviour should have consequences
Most importantly, the correct culture must be set at the Board and Senior Management level (tone at the top) and must be demonstrated to staff through “walk the talk” not “talk the talk”.Incorrect
Key elements to creating and maintaining a good risk culture are
Risk and risk management must be understood by all of your staff. They cannot have a strong culture around what they do not understand. Also read: What does it take to be a Risk Manager?
The risk management framework must be aligned as a business enabler, not a hindrance
The risk management process must be efficient and not cumbersome
Risk management should be simple and easy to understand. It should be kept “real”
Good behaviour and actions should be recognised and rewarded. Bad behaviour should have consequences
Most importantly, the correct culture must be set at the Board and Senior Management level (tone at the top) and must be demonstrated to staff through “walk the talk” not “talk the talk”. -
Question 9 of 10
9. Question
When the right thinking and behaviours exist, what specific actions for each staff member with respect to risk management can be implemented? (Select all that applies)
Correct
Calling out, escalating, recording, reporting and managing all-risk incidents as soon as they occur, reviewing key risk indicators in amber and red and following them up on a timely manner, following up outstanding actions and ensuring they are implemented by the due date should be implemented with respect to risk management.
Incorrect
Calling out, escalating, recording, reporting and managing all-risk incidents as soon as they occur, reviewing key risk indicators in amber and red and following them up on a timely manner, following up outstanding actions and ensuring they are implemented by the due date should be implemented with respect to risk management.
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Question 10 of 10
10. Question
Without becoming directly involved in managing risk, boards can fulfil their role in risk oversight by engaging in the following except
Correct
The board should not take a direct role in managing risks. The board’s role should be limited to risk oversight of management and corporate issues that affect risk. Without becoming directly involved in managing risk, boards can fulfil their role in risk oversight by:
Developing policies and procedures around the risk that are consistent with the organization’s strategy and risk appetite.
Following up on management’s implementation of risk management policies and procedures.
Following up to be assured that risk management policies and procedures function as they are intended.
Taking steps to foster risk awareness.
Encourage an organizational culture of risk adjusting awareness.Incorrect
The board should not take a direct role in managing risks. The board’s role should be limited to risk oversight of management and corporate issues that affect risk. Without becoming directly involved in managing risk, boards can fulfil their role in risk oversight by:
Developing policies and procedures around the risk that are consistent with the organization’s strategy and risk appetite.
Following up on management’s implementation of risk management policies and procedures.
Following up to be assured that risk management policies and procedures function as they are intended.
Taking steps to foster risk awareness.
Encourage an organizational culture of risk adjusting awareness.