Managing operational risk in payment, clearing and settlement systems in banking industry: a case study

Abstract

Awareness of operational risk has increased greatly in recent years for Payment, Clearing, and Settlement Systems (PCSS) in banking industry. PCSS consist of networks of interconnected elements (i.e., Bangladesh Bank as central operator, different banks as participants). Operational problems at any one of the key elements have the potential to disrupt the system as a whole and negatively affect financial stability. Operational risks mean a range of threats from loss of key personnel, settlement failure, and compliance failure, to theft, systems failure and building damage. Operational risk management aims to ensure the integrity and quality of the operations of Payment, Clearing, and Settlement Systems (PCSS) using Risk Management System (RMS) Software, Business Continuity and Disaster Recovery Planning (BCP and DRP). This thesis identifies and analyzes various operational risks occurring in payments systems of banking industry. An Operational Risk Management (ORM) framework including RMS Software, BCP and DRP have been built in terms of the potential outcomes of operational events from certain risk factors such as systems problems, human error, process problems, and external events, their likelihood, and their frequency. In the meantime, qualitative analysis provided by operations experts associated with the various elements of PCSS will be important for judging the potential impact and frequency of events. Once operational risk databases are developed that record the frequency and severity of operational events then it will be possible to effectively manage operational risks in PCSS. In a changing financial environment, it is hoped that this risk management framework could be used for managing operational risk in payment, clearing, and settlement systems of banking industry.