Banking Operations

Operations in Banking & Financial Services

The Changing Banking Paradigm External drivers compel banks to leverage the developments in Information Technology and continuously innovate

 Regulatory change and consolidation  Competitive forces  Changing Consumer Preference  Technological developments  Basel II  IAS

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Operational Risk Operational risk can arise from failure to comply with policies, laws and regulations, from fraud or forgery, or from a breakdown in the availability or integrity of services, systems or information. » » » » » »

Event risk (Year 2000, Euro, Basel 2, IAS) Payments/settlement risk Technology/systems exposure Fraud/compliance risk Natural disaster Change management

Sources of Operational Risk

Differences between Three Lines of Business

Risk In Banking Sector

Equity Risk Market Risk

Interest Rate Risk

Trading Risk Gap Risk

Currency Risk Commodity Risk

Financial Risks

Transaction Risk

Counterparty Risk

Portfolio Concentration Risk

Issuer Risk

Credit Risk Liquidity Risk Operational Risk Regulatory Risk Human Factor Risk

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Understanding Market Risk

It is the risk that the value of tangible and intangible of a financial institution will be adversely affected by movements in market rates or prices such as  Interest rates,  Equity prices,  Foreign exchange rates  Credit spreads  Commodity prices Resulting in a loss to earnings and capital.

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Waste In Banking

»Waste No.1: Over-Processing: Adding more value to a service or product than customers want or will pay for »Waste No. 2: Transportation: Unnecessary movement of materials, products or information »Waste No. 3: Motion: Needless movement of people »Waste No. 4: Inventory: Any work-in-process that is in excess of what is required to produce for the customer

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Waste In Banking…

»Waste No. 5: Waiting: Any delay between when one process step/activity ends and the next step/activity begins »Waste No. 6: Defects: Any aspect of the service that does not conform to customer needs »Waste No. 7: Overproduction: Production of service outputs or products beyond what is needed for immediate use

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Example…Pain Areas

» The account opening process had many inter-linked & sequential processes. » One of the most critical ones was the “Dispatch of PIN” to use the ATM services. » Many customers did not receive the PIN at all resulting in customer complaints, hence belying their expectation of a hassle-free banking. » Losing Customer Base

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CRISIL VaR Model

Multiple Portfolios

Yields Incremental Duration VaR

VaR

Portfolio Optimization

Stop Loss

Variancecovariance Matrix

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What Needs to be done

 Incorporates best-business practices  Straight Through Processing  Workflows to automate processes  Process Centralization  Single window service

 Control through relevant and timely MIS

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Efficiency – cost effective automation

Efficiency has become necessary evil and no longer an competitive tool for Banks:

 Eliminates manual intervention  Enables process integration (workflow, document imaging)  More Automation  Reducing TAT  Reduction In Errors

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Effectiveness

    

Measure, Monitor & Manage – Value at Risk Establish good operational processes Deploy Best practices framework Streamlining the processes Innovation

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Thank You