Briefly describe the steps in the operational risk management process.

The operational risk management process involves three key steps: identification and assessment, monitoring and reporting, and control and mitigation.

Step 1: Identification and Assessment

Effective risk identification considers both internal and external factors. Internal factors include the bank’s structure, nature of activities, quality of human resources, organisational changes, and employee turnover. External factors include changes in the broader environment, industry developments, and technology advances.

Tools for identifying and assessing operational risk include:

Audit findings from internal and external auditors.
Internal loss data collection and analysis.
External data collection and analysis — learning from industry-wide loss events.
Risk and Control Self-Assessment (RCSA) — where business units assess their own risks.
Business process mapping — documenting processes to identify failure points.
Key Risk Indicators (KRIs) and performance indicators.
Scenario analysis — testing the impact of hypothetical adverse events.

Step 2: Monitoring and Reporting

Operational risk reports must contain internal financial, operational, and compliance indicators — as well as external market or environmental information relevant to decision making.

Reports must include breaches of the bank’s risk appetite and tolerance, details of recent significant internal operational risk events and losses, and relevant external events. Appropriate reporting mechanisms must be in place at the Board, senior management, and business line levels.

Step 3: Control and Mitigation

Banks must have a strong control environment utilising policies, processes, and systems. Components of a sound internal control system include:

Appropriate segregation of duties to prevent fraud and errors.
Clearly established authorities and processes for transaction approval.
Close monitoring of adherence to assigned risk thresholds and limits.
Safeguards for access to and use of bank assets and records.
Adequate staffing and training to maintain expertise.
Ongoing processes to identify business lines where returns appear out of line with expectations.
Regular verification and reconciliation of transactions and accounts.
A vacation policy requiring officers to be absent from duties for at least two consecutive weeks, to detect fraud that depends on continuous presence.