The regulators should be mindful of high operational risks in these businesses and bring them to the attention of banks. 9. Uncertainties, regulatory challenges in promoting banks In a lighter vein, operational risks can be categorized into two, i.e. man-made risks (mistakes, faulty models, frauds, terrorism, wars etc.,) and god-made risks (earthquakes, floods, Tsunami disasters, electrical blackouts, telecom interruptions etc.) Some of these are well known and banks handle them in their own ways. Complexity of the assessment process and required changes to it, uncertainty in the implementation date of Basel Accord, the US and some European banks’ attitude towards implementing the Accord, variability in data reporting are a few factors that have created uncertainties in banks as well as regulators’ minds. I believe that these challenges can be overcome if banks can be encouraged to adopt a systematic approach as set out in Basle II. First and foremost, regulators have to get banks to commit to a risk mitigation cycle which consists of (a) risk diagnosis (i.e. prioritization of objectives, documentation review/meetings and building up of a risk control culture profile); (b) risk identification within a framework; (c) risk assessment and preparation of action plan; and (d) risk reporting. 10. The choice of the approach/models banks wish to adopt may have significant implications. Score card, loss distributions and internet modeling are some of the popular risk models. All of them have implementation challenges, in particular, skills shortage, non-availability of reliable data and suitable IT systems.

Today’s consensus is that payments, clearing, and settlement systems must be safe, reliable, efficient, and secure, which are critical to financial system stability. That’s why most regulators, the central banks in particular, have become owners and operators of clearing and settlement systems. Although the tendency is to outsource this function, many regulators at some stage or other have owned or operated these systems. 7. Another technology related risk is the desire of banks to acquire the leading edge with propriety systems, stand alone systems and specific IT systems. Banks tend to hang onto this short-lived approach. Individual systems are costly not only to banks themselves, but also to customers. The norms should be not attracting customers, but reducing their operational risks and reduction of transaction costs to customers. Both are often forgotten or ignored by banks and continuous reminding has become a regulatory responsibility. Despite moral suasion banks in many countries have not realized the gains of having common ATM platforms, back-up sites, disaster recovery sites and sharing of costs. 8. It may also be necessary to for banks to recognize that different risks matter in different lines of businesses. A comparison of business unit economic capital requirement by risk type indicates that operational risk is highest in fund management, private banking, and in retail banking when compared to corporate banking, insurance business (if banks are allowed to engage in). The new operational risk element is expected to hit banks specializing in areas - such as custodian arrangements and asset management.