Podcast
Questions and Answers
What is the main purpose of thematic on-site visits conducted by supervisors?
What is the main purpose of thematic on-site visits conducted by supervisors?
Which operational risk is likely addressed by thematic visits after major events like 9/11 or the 2007-9 crisis?
Which operational risk is likely addressed by thematic visits after major events like 9/11 or the 2007-9 crisis?
Supervisory bodies rely on which of the following to manage their resources effectively?
Supervisory bodies rely on which of the following to manage their resources effectively?
What is a common approach by supervisors in issuing guidance on operational risk?
What is a common approach by supervisors in issuing guidance on operational risk?
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Which of these is NOT a focus for supervisors during thematic visits?
Which of these is NOT a focus for supervisors during thematic visits?
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What type of events influence the resource allocation of supervisory bodies?
What type of events influence the resource allocation of supervisory bodies?
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When conducting thematic visits, which type of expert might a supervisory body hire?
When conducting thematic visits, which type of expert might a supervisory body hire?
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Which statement accurately reflects the supervisory approach towards operational risk?
Which statement accurately reflects the supervisory approach towards operational risk?
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What act was implemented in response to corporate failures around the year 2000?
What act was implemented in response to corporate failures around the year 2000?
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What was a key aim of the Sarbanes-Oxley Act regarding financial accounts?
What was a key aim of the Sarbanes-Oxley Act regarding financial accounts?
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Which financial scandals prompted the implementation of the Sarbanes-Oxley Act?
Which financial scandals prompted the implementation of the Sarbanes-Oxley Act?
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What significant requirement does the Sarbanes-Oxley Act impose on large firms?
What significant requirement does the Sarbanes-Oxley Act impose on large firms?
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What consequence does a failure to comply with the Sarbanes-Oxley Act have?
What consequence does a failure to comply with the Sarbanes-Oxley Act have?
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How did critics view the implications of implementing the Sarbanes-Oxley Act?
How did critics view the implications of implementing the Sarbanes-Oxley Act?
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What aspect of financial reporting did SOX particularly emphasize?
What aspect of financial reporting did SOX particularly emphasize?
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What has been a routine practice in US corporations since the inception of the Sarbanes-Oxley Act?
What has been a routine practice in US corporations since the inception of the Sarbanes-Oxley Act?
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What is a commonly held view regarding setting capital for operational risk in banks?
What is a commonly held view regarding setting capital for operational risk in banks?
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What problem arises from the Basel Committee's capital levels in relation to operational risk?
What problem arises from the Basel Committee's capital levels in relation to operational risk?
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What do critics argue about the calibration of capital standards for operational risk?
What do critics argue about the calibration of capital standards for operational risk?
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How might the correlation (or lack thereof) between operational, credit, and market risk affect bank capital management?
How might the correlation (or lack thereof) between operational, credit, and market risk affect bank capital management?
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What criticism is levied against banks concerning the management of operational risk?
What criticism is levied against banks concerning the management of operational risk?
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What is the primary issue identified in the operational risk capital approaches discussed?
What is the primary issue identified in the operational risk capital approaches discussed?
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Which of the following describes the relationship between operational losses and annual profit in banks?
Which of the following describes the relationship between operational losses and annual profit in banks?
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What might the setting of capital for operational risk potentially distract banks from?
What might the setting of capital for operational risk potentially distract banks from?
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What does the Internal Loss Multiplier (ILM) relate to in calculating capital requirements?
What does the Internal Loss Multiplier (ILM) relate to in calculating capital requirements?
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How does the ILM change with respect to the ratio of Loss Component (LC) to Bank Internal Capital (BIC)?
How does the ILM change with respect to the ratio of Loss Component (LC) to Bank Internal Capital (BIC)?
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What discretion do national supervisors have regarding the ILM?
What discretion do national supervisors have regarding the ILM?
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What significant change occurred in operational risk regulation for insurance firms with the introduction of Solvency II?
What significant change occurred in operational risk regulation for insurance firms with the introduction of Solvency II?
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What is the Loss Component (LC) based on for calculating the ILM?
What is the Loss Component (LC) based on for calculating the ILM?
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Why must banks disclose their historical operational risk losses, even if the ILM is set to one?
Why must banks disclose their historical operational risk losses, even if the ILM is set to one?
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When was the Solvency II directive implemented for insurance regulation?
When was the Solvency II directive implemented for insurance regulation?
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Which of the following best describes the purpose of the Internal Loss Multiplier (ILM)?
Which of the following best describes the purpose of the Internal Loss Multiplier (ILM)?
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What is a primary concern regulators address through inspection teams sent to outsourced bodies?
What is a primary concern regulators address through inspection teams sent to outsourced bodies?
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What event significantly increased the emphasis on business continuity management by regulators?
What event significantly increased the emphasis on business continuity management by regulators?
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What is a key requirement for financial firms regarding their business continuity management plans?
What is a key requirement for financial firms regarding their business continuity management plans?
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What document introduced regulatory guidelines on business continuity management in 2006?
What document introduced regulatory guidelines on business continuity management in 2006?
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Why have regulators intensified their focus on legal and documentation risk?
Why have regulators intensified their focus on legal and documentation risk?
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What aspect of legal risks are firms advised to consider in their first line of defense?
What aspect of legal risks are firms advised to consider in their first line of defense?
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What are regulators particularly concerned about in relation to third-party legal opinions?
What are regulators particularly concerned about in relation to third-party legal opinions?
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What can be a consequence of faulty backup arrangements in firms, as highlighted by historical events?
What can be a consequence of faulty backup arrangements in firms, as highlighted by historical events?
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Study Notes
Sarbanes-Oxley Act (SOX) of 2002
- Implemented in response to corporate scandals like Enron and WorldCom, aimed at restoring investor confidence.
- Requires large firms to clearly define and document key controls and processes for financial accounting.
- Mandates sign-off by firm executives and external auditors for the accuracy of financial reports.
- Non-compliance can result in criminal charges, emphasizing accountability.
- Focuses on both on-balance sheet and off-balance sheet items, addressing vulnerabilities that led to scandals.
- Criticized for high implementation costs and extensive documentation, raising concerns about readability and understanding.
- Since its inception, compliance has become a normalized part of risk management frameworks in U.S. corporations.
Evolving Approaches to Regulation and Supervision
Supervision of Operational Risk
- Supervisors conduct thematic on-site visits to examine specific operational risks, such as cybercrime or financial crime.
- Thematic visits result in guidance papers indicating necessary industry improvements.
- Supervisors utilize specialized staff or external consultants to address particular risks due to limited resources.
Business Continuity Management
- Became a priority for regulators after 9/11, prompted by inadequate backup systems found in key financial firms.
- Regulations now mandate effective business continuity plans that must be periodically tested under real conditions.
- Scenarios and peer comparisons assist in evaluating firms' preparedness for systemic risks.
Documentation and Legal Risk
- Increasing litigation has heightened regulatory focus on the adequacy of firms' legal procedures and documentation.
- Regulators expect compliance with current legal practices and often require third-party legal opinions.
- Firms should involve general counsel in assessing legal risks, considering this need in their risk management strategy.
Operational Risk Capital for Banks
- Operational risk models assess the probability (frequency) of risk events against their severity (losses).
- Criticism exists regarding the effectiveness of setting capital for operational risks, with debates on its necessity given actual loss experiences.
- Concerns about correlation between operational, credit, and market risks; a catastrophic event might expose capital inadequacies.
- Discussion on whether capital allocation distracts from effective operational risk management through systems and controls.
- Internal Loss Multiplier (ILM) and Business Indicator Component (BIC) calculations play roles in determining capital requirements based on historical losses.
Operational Risk Capital for Insurance Firms
- Insurance companies in the European Economic Area adhere to the Solvency I directive, which has limited directives on operational risk.
- Introduction of Solvency II directive in January 2016 marked a significant shift in regulation, enhancing governance frameworks for insurance operations.
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Description
This quiz explores the role of thematic on-site visits in overseeing operational risks like cyber-crime and financial crime. It focuses on how supervisors assess the industry’s practices and suggest improvements. Test your understanding of supervisory frameworks and risk management techniques.