Operational risk management (2)
ujjmishra1
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Dec 03, 2013
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Slide Content
Minimizing Operational Risk
& Optimizing Institutional
Performance
& Optimizing Institutional
Performance
2
Interest in Enterprise-wide Risk Assessments is
being driven by Financial & Economic Realities
•Global spotlight on risk and corporate governance
–Sarbanes-Oxley Act of 2003 & COSO ERM Framework
•Increased involvement from the Audit Committee of the
Board of Directors with regard to risk management
–NYSE listing requirements
•Capital adequacy requirements and the need for efficient
capital allocation
–Basel Capital Accord
•Need for alternative risk solutions due to the current
insurance environment
•Maximizing shareholder value
•Sustaining a competitive advantage
Interest in Enterprise-wide Risk Assessments is
being driven by Financial & Economic Realities
•Global spotlight on risk and corporate governance
–Sarbanes-Oxley Act of 2003 & COSO ERM Framework
•Increased involvement from the Audit Committee of the
Board of Directors with regard to risk management
–NYSE listing requirements
•Capital adequacy requirements and the need for efficient
capital allocation
–Basel Capital Accord
•Need for alternative risk solutions due to the current
insurance environment
•Maximizing shareholder value
•Sustaining a competitive advantage
3
“The risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and
systems or from external events”
Operational risk can result in increased write-offs,
additional expenses or loss of revenue
Basel Committee’s Definition of Operational Risk
“The risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and
systems or from external events”
Operational risk can result in increased write-offs,
additional expenses or loss of revenue
Basel Committee’s Definition of Operational Risk
4
Operational Risk Management &
Shareholder Value
Examples of how operational risk management
drives shareholder value?
•Improving operating efficiency and thus operating margins,
by identifying and prioritising process improvement and de-
risking opportunities
•Improving management effectiveness by enhancing the
governance structure
•Enabling more effective capital usage by introducing
processes to assess exposure & integrate this with an
economic capital model
•Protecting assets by reducing losses through improved risk
control environment and financing programme
•Enhanced organizational capabilities & subsequent
competitive positioning through continuous improvement
Operational Risk Management &
Shareholder Value
Examples of how operational risk management
drives shareholder value?
•Improving operating efficiency and thus operating margins,
by identifying and prioritising process improvement and de-
risking opportunities
•Improving management effectiveness by enhancing the
governance structure
•Enabling more effective capital usage by introducing
processes to assess exposure & integrate this with an
economic capital model
•Protecting assets by reducing losses through improved risk
control environment and financing programme
•Enhanced organizational capabilities & subsequent
competitive positioning through continuous improvement
5
How to Reduce Operational Risks?
Understand Risks
•Benchmarking
•Scenario Analysis
•Key Risk Indicator’s (KRI)
De-Risking Operational Procedures
•Define, Measure, Analyze, Improve, & Control
Risk Finance & Transfer
•Mapping to Insurance Products
•Developing New Products
•Financing Retained Losses
•Transferring Risk to the Insurance & Capital Markets
How to Reduce Operational Risks?
Understand Risks
•Benchmarking
•Scenario Analysis
•Key Risk Indicator’s (KRI)
De-Risking Operational Procedures
•Define, Measure, Analyze, Improve, & Control
Risk Finance & Transfer
•Mapping to Insurance Products
•Developing New Products
•Financing Retained Losses
•Transferring Risk to the Insurance & Capital Markets
6
Op Risk/Lean Six Sigma Linkage
Op Risk Needs Six Sigma Can Provide
Identification of critical
processes and activities
Hierarchical, process view of
a business
Monitoring of key indicators
and warning of potential
problems
Process Management &
Control
Cure problems in existing
processes
Process Improvement via
DMAIC & Lean
Prevention of problems for
new processes
Process Design via DFSS
Op Risk/Lean Six Sigma Linkage
Op Risk Needs Six Sigma Can Provide
Identification of critical
processes and activities
Hierarchical, process view of
a business
Monitoring of key indicators
and warning of potential
problems
Process Management &
Control
Cure problems in existing
processes
Process Improvement via
DMAIC & Lean
Prevention of problems for
new processes
Process Design via DFSS
7
Six Sigma Defined
•A data driven approach to understanding and
eliminating process variation and defects
•Three, universal, methodologies for process
management
•A performance target of 3.4 defects per million
opportunities
Six Sigma Defined
•A data driven approach to understanding and
eliminating process variation and defects
•Three, universal, methodologies for process
management
•A performance target of 3.4 defects per million
opportunities
8
Risk Management: How Can Six Sigma Help?
•Six Sigma provides three powerful methodologies
for:
–Designing robust processes
–Fixing broken processes
–Controlling processes on an ongoing basis (i.e.,
keeping them from decaying and producing errors)
Risk Management: How Can Six Sigma Help?
•Six Sigma provides three powerful methodologies
for:
–Designing robust processes
–Fixing broken processes
–Controlling processes on an ongoing basis (i.e.,
keeping them from decaying and producing errors)
9
Risk Management: How Can Six Sigma Help?
•Designing robust processes:
–A structured methodology, DFSS (Design for Six
Sigma), assures that:
•New processes have high capability (satisfy customers
and produce low defects) right from the start
•New processes are designed to minimize the risk of
failure
Risk Management: How Can Six Sigma Help?
•Designing robust processes:
–A structured methodology, DFSS (Design for Six
Sigma), assures that:
•New processes have high capability (satisfy customers
and produce low defects) right from the start
•New processes are designed to minimize the risk of
failure
10
•Fixing broken processes:
–A structured methodology, DMAIC (Define,
Measure, Analyse, Improve, Control):
•Uses powerful statistical (and non-statistical) tools to
locate and eliminate the root causes of otherwise
intractable problems
•Focuses on removal and prevention of defects
•Reduces process variability
Risk Management: How Can Six Sigma Help?
•Fixing broken processes:
–A structured methodology, DMAIC (Define,
Measure, Analyse, Improve, Control):
•Uses powerful statistical (and non-statistical) tools to
locate and eliminate the root causes of otherwise
intractable problems
•Focuses on removal and prevention of defects
•Reduces process variability
Risk Management: How Can Six Sigma Help?
11
•Controlling processes, so that their behavior is
predictable (within limits). Six Sigma provides:
–Special tools and techniques including a framework:
•For measuring and judging process variation
•For detecting special causes
•To providing early warning of process changes
–The ability to calculate Process Sigma, an index of
process performance
Risk Management: How Can Six Sigma Help?
•Controlling processes, so that their behavior is
predictable (within limits). Six Sigma provides:
–Special tools and techniques including a framework:
•For measuring and judging process variation
•For detecting special causes
•To providing early warning of process changes
–The ability to calculate Process Sigma, an index of
process performance
Risk Management: How Can Six Sigma Help?
12
Companies Pursue Six Sigma to …
•Accommodate customer demands
•Drive out waste, cycle time and variability
•Direct improvement resource to the most significant
opportunities
•Establish a standard improvement methodology
•Develop leaders
•Reduce risk
•Grow the top-line
•Implement business strategy
•Increase product reliability
•Initiate cultural change
•Accelerate improvement
Companies Pursue Six Sigma to …
•Accommodate customer demands
•Drive out waste, cycle time and variability
•Direct improvement resource to the most significant
opportunities
•Establish a standard improvement methodology
•Develop leaders
•Reduce risk
•Grow the top-line
•Implement business strategy
•Increase product reliability
•Initiate cultural change
•Accelerate improvement
13
Sigma is a Measure of
Process Capability
Six Sigma is a level of process capability such
that less than 3.4 “defects” are produced for
every million opportunities.
Sigma
1
2
3
4
5
6
DPMO
680,000
298,000
67,000
6,000
400
3.4
Performance
boundary
Process
performance
Requirement
1
2
3
4
5
6
Sigma is a Measure of
Process Capability
Six Sigma is a level of process capability such
that less than 3.4 “defects” are produced for
every million opportunities.
Sigma
1
2
3
4
5
6
DPMO
680,000
298,000
67,000
6,000
400
3.4
Performance
boundary
Process
performance
Requirement
1
2
3
4
5
6
14
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Harry, Mikel J., Six Sigma: A Breakthrough Strategy for Profitability, Quality Progress, May 1998
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Harry, Mikel J., Six Sigma: A Breakthrough Strategy for Profitability, Quality Progress, May 1998
Estimating the Benefits of Six Sigma
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Harry, Mikel J., Six Sigma: A Breakthrough Strategy for Profitability, Quality Progress, May 1998
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Sigma Level
3
4
5
6
Cost of Quality
20-30% of Sales
15-20% of Sales
10-15% of Sales
< 10% of Sales
Defects Per Million
66,807
6,210
233
3.4
Harry, Mikel J., Six Sigma: A Breakthrough Strategy for Profitability, Quality Progress, May 1998
Estimating the Benefits of Six Sigma
15
Process Sigma Advantages
The Sigma Scale provides a common metric for comparisonThe Sigma Scale provides a common metric for comparison
that includes the customer requirement and the degree of that includes the customer requirement and the degree of
variation. Addresses multiple occurrences.variation. Addresses multiple occurrences.
The Sigma Scale provides a common metric for comparisonThe Sigma Scale provides a common metric for comparison
that includes the customer requirement and the degree of that includes the customer requirement and the degree of
variation. Addresses multiple occurrences.variation. Addresses multiple occurrences.
PROCESS PERFORMANCE
Call servicing 32 seconds ASA vs goal of 35
Billing 98% accuracy, on time, right location
Accounts Receivable33 days average aging vs goal of 40
Customer Service82% rated 4 or 5 responsiveness
Process Sigma Advantages
The Sigma Scale provides a common metric for comparisonThe Sigma Scale provides a common metric for comparison
that includes the customer requirement and the degree of that includes the customer requirement and the degree of
variation. Addresses multiple occurrences.variation. Addresses multiple occurrences.
The Sigma Scale provides a common metric for comparisonThe Sigma Scale provides a common metric for comparison
that includes the customer requirement and the degree of that includes the customer requirement and the degree of
variation. Addresses multiple occurrences.variation. Addresses multiple occurrences.
PROCESS PERFORMANCE
Call servicing 32 seconds ASA vs goal of 35
Billing 98% accuracy, on time, right location
Accounts Receivable33 days average aging vs goal of 40
Customer Service82% rated 4 or 5 responsiveness
16
The Antecedents of Six Sigma
•Six Sigma is the latest and most powerful in a long
line of process management and process
improvement methods, e.g.:
–Guilds
–The Scientific Method
–Quality Circles
–TQM
•Six Sigma has built on these ideas and added
powerful tools
•It is specially useful for transactional processes
The Antecedents of Six Sigma
•Six Sigma is the latest and most powerful in a long
line of process management and process
improvement methods, e.g.:
–Guilds
–The Scientific Method
–Quality Circles
–TQM
•Six Sigma has built on these ideas and added
powerful tools
•It is specially useful for transactional processes
17
Principle 1
The board of directors should be aware of the major aspects
of the bank’s operational risks as a distinct risk category that
should be managed, and it should approve and periodically
review the bank’s operational risk management framework.
The framework should provide a firm-wide definition of
operational risk and lay down the principles of how
operational risk is to be identified, assessed, monitored,
and controlled/mitigated.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
Principle 1
The board of directors should be aware of the major aspects
of the bank’s operational risks as a distinct risk category that
should be managed, and it should approve and periodically
review the bank’s operational risk management framework.
The framework should provide a firm-wide definition of
operational risk and lay down the principles of how
operational risk is to be identified, assessed, monitored,
and controlled/mitigated.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
18
Principle 2
The board of directors should ensure that the bank’s
operational risk management framework is subject to
effective and comprehensive internal audit by
operationally independent, appropriately trained and
competent staff. The internal audit function should not be
directly responsible for operational risk management.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
Principle 2
The board of directors should ensure that the bank’s
operational risk management framework is subject to
effective and comprehensive internal audit by
operationally independent, appropriately trained and
competent staff. The internal audit function should not be
directly responsible for operational risk management.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
19
Principle 3
Senior management should have responsibility for implementing
the operational risk management framework approved by the
board of directors. The framework should be implemented
throughout the whole banking organization, and all levels of staff
should understand their responsibilities with respect to
operational risk management. Senior management should
also have responsibility for developing policies, processes
and procedures for managing operational risk in all of the
bank’s products, activities, processes and systems.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
Principle 3
Senior management should have responsibility for implementing
the operational risk management framework approved by the
board of directors. The framework should be implemented
throughout the whole banking organization, and all levels of staff
should understand their responsibilities with respect to
operational risk management. Senior management should
also have responsibility for developing policies, processes
and procedures for managing operational risk in all of the
bank’s products, activities, processes and systems.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
20
Principle 4
Banks should identify and assess the operational risk
inherent in all material products, activities, processes
and systems. Banks should also ensure that before
new products, activities, processes and systems are
introduced or undertaken, the operational risk
inherent in them is subject to adequate assessment
procedures.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
Principle 4
Banks should identify and assess the operational risk
inherent in all material products, activities, processes
and systems. Banks should also ensure that before
new products, activities, processes and systems are
introduced or undertaken, the operational risk
inherent in them is subject to adequate assessment
procedures.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
21
Principle 5
Banks should implement a process to regularly monitor
operational risk profiles and material exposure to
losses. There should be regular reporting of pertinent
information to senior management and the board of
directors that supports the proactive management of
operational risk.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
Principle 5
Banks should implement a process to regularly monitor
operational risk profiles and material exposure to
losses. There should be regular reporting of pertinent
information to senior management and the board of
directors that supports the proactive management of
operational risk.
Source: Sound Practices for the Management & Supervision
of Operational Risk (Basel Committee – July 2002)
Sound Practices in
Operational Risk Management
22
The 6s Process
IMPROVE
Operational Risk
Assessment & Analysis
New
Process
Capability
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement
System Validation
Process
Specifications
New Process
Pilot
New Policies
& Procedures
Identify Key
Risk Drivers
Correlation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
The 6s Process
IMPROVE
Operational Risk
Assessment & Analysis
New
Process
Capability
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement
System Validation
Process
Specifications
New Process
Pilot
New Policies
& Procedures
Identify Key
Risk Drivers
Correlation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
O
R
I M
A
P
r o
c
e
s
s
M
a
p
p
i n
g
C
a
p
a
b
i l i t y
A
n
a
l y
s
i s
C
o
n
t r o
l C
h
a
r t s
&
S
P
C
C
&
E
A
n
a
l y
s
i s
Creating Management Awareness
Identification & Risk Mapping
Quantification & Modelling
Risk Profiling
Risk Solutions
Monitoring & Updating
L
e
v
e
l 1
B
u
s
i n
e
s
s
L
i n
e
s
• Natural Linkage to Operational Risk Management Framework
• Operates at Level 1, Level 2 and Activity Group Level (All Business Lines)
• Linked to All Products, Activities, Processes, and Systems
• DMAIC Employed to Improve Existing Policies, Procedures, and
Processes….DFSS Leveraged to Design New Ones
• Natural Linkage to Operational Risk Management Framework
• Operates at Level 1, Level 2 and Activity Group Level (All Business Lines)
• Linked to All Products, Activities, Processes, and Systems
• DMAIC Employed to Improve Existing Policies, Procedures, and
Processes….DFSS Leveraged to Design New Ones
Operational Risk Definition & Analysis
L
e
v
e
l
2
&
A
c
t
i
v
i
t
y
G
r
o
u
p
s
Operational Risk
Management
Framework
Mapping 6s to Operational Risk Framework
R
I M
A
P
r o
c
e
s
s
M
a
p
p
i n
g
C
a
p
a
b
i l i t y
A
n
a
l y
s
i s
C
o
n
t r o
l C
h
a
r t s
&
S
P
C
C
&
E
A
n
a
l y
s
i s
Creating Management Awareness
Identification & Risk Mapping
Quantification & Modelling
Risk Profiling
Risk Solutions
Monitoring & Updating
L
e
v
e
l 1
B
u
s
i n
e
s
s
L
i n
e
s
• Natural Linkage to Operational Risk Management Framework
• Operates at Level 1, Level 2 and Activity Group Level (All Business Lines)
• Linked to All Products, Activities, Processes, and Systems
• DMAIC Employed to Improve Existing Policies, Procedures, and
Processes….DFSS Leveraged to Design New Ones
• Natural Linkage to Operational Risk Management Framework
• Operates at Level 1, Level 2 and Activity Group Level (All Business Lines)
• Linked to All Products, Activities, Processes, and Systems
• DMAIC Employed to Improve Existing Policies, Procedures, and
Processes….DFSS Leveraged to Design New Ones
Operational Risk Definition & Analysis
L
e
v
e
l
2
&
A
c
t
i
v
i
t
y
G
r
o
u
p
s
Operational Risk
Management
Framework
Mapping 6s to Operational Risk Framework
24
Operational Risk Management Using 6s
Business Line Description
Potential Risk
Factors
Potential Failure
Effects
Potential
Causes
Current
Controls
Business Line
Risk
(Exposure
Indicator - EI)
Probability
of Loss
Event (PE)
Loss
Given
Event
Occurs
(LGE)
Expected
Loss (EL)
1Corporate Finance - - - - 0.50 0.10 100 5.00
2Trading and Sales - - - - - - - -
3Retail Banking - - - - - - - -
4Commercial Banking - - - - - - - -
5Payment and Settlement - - - - - - - -
6Agency Services - - - - - - - -
7Asset Management - - - - - - - -
8Retail Brokerage - - - - - - - -
Operational Risk Internal Measurement Analysis (ORIMA)
Six Sigma Focus
• Identify Risks
• Describe Outcome of Failure
• Determine Cause & Effect
• Evaluate Current Controls
Expected
Loss Factors ORIMA Drills-Down From Top Level
Business Line to the Processes
Within Each Activity Group
ORIMA Drills-Down From Top Level
Business Line to the Processes
Within Each Activity Group
Operational Risk Management Using 6s
Business Line Description
Potential Risk
Factors
Potential Failure
Effects
Potential
Causes
Current
Controls
Business Line
Risk
(Exposure
Indicator - EI)
Probability
of Loss
Event (PE)
Loss
Given
Event
Occurs
(LGE)
Expected
Loss (EL)
1Corporate Finance - - - - 0.50 0.10 100 5.00
2Trading and Sales - - - - - - - -
3Retail Banking - - - - - - - -
4Commercial Banking - - - - - - - -
5Payment and Settlement - - - - - - - -
6Agency Services - - - - - - - -
7Asset Management - - - - - - - -
8Retail Brokerage - - - - - - - -
Operational Risk Internal Measurement Analysis (ORIMA)
Six Sigma Focus
• Identify Risks
• Describe Outcome of Failure
• Determine Cause & Effect
• Evaluate Current Controls
Expected
Loss Factors ORIMA Drills-Down From Top Level
Business Line to the Processes
Within Each Activity Group
ORIMA Drills-Down From Top Level
Business Line to the Processes
Within Each Activity Group
5004003002001000
150
100
50
Observation Number
I
n
d
iv
id
u
a
l
V
a
lu
e
I Chart for Approval
1
Mean=98.13
UCL=156.0
LCL=40.23
17015013011090705030
UBUB
Process Capability Analysis for Approval CT_
PPM Total
PPM > UB
PPM < LSL
PPM Total
PPM > UB
PPM < LSL
PPM Total
PPM > UB
PPM < LSL
Ppk
PPL
PPU
Pp
Cpm
Cpk
CPL
CPU
Cp
StDev (Overall)
StDev (Within)
Sample N
Mean
LSL
Target
Upper Bound
*
*
*
*
*
*
133962.26
133962.26
*
*
*
*
*
*
*
*
*
*
19.5817
19.2991
530
98.126
*
*
120.000
Exp. "Overall" PerformanceExp. "Within" PerformanceObserved PerformanceOverall Capability
Potential (Within) Capability
Process Data
Within
Overall
Receive Loan
Application
Review
Application
Enter in
System
Loan
Approval
Notify Bank
Manager &
Customer
NO
YES
Approve Loan
Amount
Prepare
Documents
Notify Bank &
Customer
Customer
Signs
Paperwork
Enter in
System
Disperse
Funds
Material
Fast Loan
Approval
Methods
Machine Environment
# of loan processors
Internet capability
Easy to understand instructions
Manager approval
Processor Review
# of underwriters
Disclosures
Application
Create approval letter
Remote Printing
Credit Score
Loan amount
Material
Fast Loan
Approval
Methods
Machine Environment
# of loan processors
Internet capability
Easy to understand instructions
Manager approval
Processor Review
# of underwriters
Disclosures
Application
Create approval letter
Remote Printing
Credit Score
Loan amount
<$
16
0,000
$1
60,00
0-$199,00
0
$2
00,00
0-$299,00
1
$3
00,00
0-$499,00
2
O
thers
254 164 53 38 21
47.9 30.9 10.0 7.2 4.0
47.9 78.9 88.9 96.0 100.0
0
100
200
300
400
500
0
20
40
60
80
100
Defect
Count
Percent
Cum %
P
e
r
c
e
n
t
C
o
u
n
t
Pareto Chart for Loan Amount
Busi ness Line Desc ription
Po tential R isk
Fa ctors
Potential Failure
E ffects
Potential
C auses
C urrent
Controls
Busi ness Li ne
Risk
(Exposure
Indicator - EI)
Probability
of Los s
Event (PE )
Loss
G iven
Event
Occurs
(LGE)
E xpected
Loss (EL)
1Corp orate Finance - - - - 0.50 0. 10 1 00 5.00
2Trading and Sales - - - - - - - -
3Reta il Banking - - - - - - - -
4Com mercial Banking - - - - - - - -
5Paym ent and Settlem ent - - - - - - - -
6Agency Services - - - - - - - -
7Asse t Management - - - - - - - -
8Reta il Brokerage - - - - - - - -
Operational Risk Internal Measurement Analysis (ORIMA)
7.27.17.0
150
100
50
pH
P
L
T
.
Y
L
D
.
S = 18.7123 R-Sq = 42.5 % R-Sq(adj) = 40.0 %
+ 1327.06 pH**2
PLT.YLD. = 68371.0 - 19042.9 pH
Regression Plot
Quadratic Model
7.27.17.0
150
100
50
pH
P
L
T
.
Y
L
D
.
S = 18.7123 R-Sq = 42.5 % R-Sq(adj) = 40.0 %
+ 1327.06 pH**2
PLT.YLD. = 68371.0 - 19042.9 pH
Regression Plot
Quadratic Model
The Discipline and Its Approach,
Combined With a Rich Set of Analysis
Tools, Makes Six Sigma a Perfect Fit
for Operational Risk Management
The Discipline and Its Approach,
Combined With a Rich Set of Analysis
Tools, Makes Six Sigma a Perfect Fit
for Operational Risk Management
Operational Risk
Assessment & Analysis
New Process
Capability
IMPROVEIMPROVEIMPROVE
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement System
Validation
Process
Specifications
New Process
Pilot
New Policies &
Procedures
Identify Key
Risk DriversCorrelation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
Operational Risk
Assessment & Analysis
New Process
Capability
IMPROVEIMPROVEIMPROVE
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement System
Validation
Process
Specifications
New Process
Pilot
New Policies &
Procedures
Identify Key
Risk DriversCorrelation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
Operational Risk Management Using 6s
150
100
50
Observation Number
I
n
d
iv
id
u
a
l
V
a
lu
e
I Chart for Approval
1
Mean=98.13
UCL=156.0
LCL=40.23
17015013011090705030
UBUB
Process Capability Analysis for Approval CT_
PPM Total
PPM > UB
PPM < LSL
PPM Total
PPM > UB
PPM < LSL
PPM Total
PPM > UB
PPM < LSL
Ppk
PPL
PPU
Pp
Cpm
Cpk
CPL
CPU
Cp
StDev (Overall)
StDev (Within)
Sample N
Mean
LSL
Target
Upper Bound
*
*
*
*
*
*
133962.26
133962.26
*
*
*
*
*
*
*
*
*
*
19.5817
19.2991
530
98.126
*
*
120.000
Exp. "Overall" PerformanceExp. "Within" PerformanceObserved PerformanceOverall Capability
Potential (Within) Capability
Process Data
Within
Overall
Receive Loan
Application
Review
Application
Enter in
System
Loan
Approval
Notify Bank
Manager &
Customer
NO
YES
Approve Loan
Amount
Prepare
Documents
Notify Bank &
Customer
Customer
Signs
Paperwork
Enter in
System
Disperse
Funds
Material
Fast Loan
Approval
Methods
Machine Environment
# of loan processors
Internet capability
Easy to understand instructions
Manager approval
Processor Review
# of underwriters
Disclosures
Application
Create approval letter
Remote Printing
Credit Score
Loan amount
Material
Fast Loan
Approval
Methods
Machine Environment
# of loan processors
Internet capability
Easy to understand instructions
Manager approval
Processor Review
# of underwriters
Disclosures
Application
Create approval letter
Remote Printing
Credit Score
Loan amount
<$
16
0,000
$1
60,00
0-$199,00
0
$2
00,00
0-$299,00
1
$3
00,00
0-$499,00
2
O
thers
254 164 53 38 21
47.9 30.9 10.0 7.2 4.0
47.9 78.9 88.9 96.0 100.0
0
100
200
300
400
500
0
20
40
60
80
100
Defect
Count
Percent
Cum %
P
e
r
c
e
n
t
C
o
u
n
t
Pareto Chart for Loan Amount
Busi ness Line Desc ription
Po tential R isk
Fa ctors
Potential Failure
E ffects
Potential
C auses
C urrent
Controls
Busi ness Li ne
Risk
(Exposure
Indicator - EI)
Probability
of Los s
Event (PE )
Loss
G iven
Event
Occurs
(LGE)
E xpected
Loss (EL)
1Corp orate Finance - - - - 0.50 0. 10 1 00 5.00
2Trading and Sales - - - - - - - -
3Reta il Banking - - - - - - - -
4Com mercial Banking - - - - - - - -
5Paym ent and Settlem ent - - - - - - - -
6Agency Services - - - - - - - -
7Asse t Management - - - - - - - -
8Reta il Brokerage - - - - - - - -
Operational Risk Internal Measurement Analysis (ORIMA)
7.27.17.0
150
100
50
pH
P
L
T
.
Y
L
D
.
S = 18.7123 R-Sq = 42.5 % R-Sq(adj) = 40.0 %
+ 1327.06 pH**2
PLT.YLD. = 68371.0 - 19042.9 pH
Regression Plot
Quadratic Model
7.27.17.0
150
100
50
pH
P
L
T
.
Y
L
D
.
S = 18.7123 R-Sq = 42.5 % R-Sq(adj) = 40.0 %
+ 1327.06 pH**2
PLT.YLD. = 68371.0 - 19042.9 pH
Regression Plot
Quadratic Model
The Discipline and Its Approach,
Combined With a Rich Set of Analysis
Tools, Makes Six Sigma a Perfect Fit
for Operational Risk Management
The Discipline and Its Approach,
Combined With a Rich Set of Analysis
Tools, Makes Six Sigma a Perfect Fit
for Operational Risk Management
Operational Risk
Assessment & Analysis
New Process
Capability
IMPROVEIMPROVEIMPROVE
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement System
Validation
Process
Specifications
New Process
Pilot
New Policies &
Procedures
Identify Key
Risk DriversCorrelation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
Operational Risk
Assessment & Analysis
New Process
Capability
IMPROVEIMPROVEIMPROVE
Project
Selection
SIPOC
Capability
Baseline
Measurement
System Validation
Establish
Controls
Measurement System
Validation
Process
Specifications
New Process
Pilot
New Policies &
Procedures
Identify Key
Risk DriversCorrelation
Analysis
Confirm
Impact
Process Risk
Mapping
Key Risk Indicators
(Dashboards)
Operational Risk Management Using 6s
26
A Way Forward
Outside In or Inside Out
•Outside In:
1.Review statistics for comparable businesses and identify risk
by type
2.Identify the processes that lie behind the risk (hierarchy)
3.Perform risk analysis on the key processes (FMEA)
4.Identify key measures inside and outside of the process
5.Collect data
6.Monitor, using dashboards and control charts. Search for
signals
7.Take action as required (DMAIC, Lean, DFSS or other)
A Way Forward
Outside In or Inside Out
•Outside In:
1.Review statistics for comparable businesses and identify risk
by type
2.Identify the processes that lie behind the risk (hierarchy)
3.Perform risk analysis on the key processes (FMEA)
4.Identify key measures inside and outside of the process
5.Collect data
6.Monitor, using dashboards and control charts. Search for
signals
7.Take action as required (DMAIC, Lean, DFSS or other)
27
•Inside Out:
A Way Forward
1.Inventory all processes
2.Identify those presenting the greatest risk
3.Identify the sub-processes that lie behind the risk (process
hierarchy)
4.Perform risk analysis on the key processes and sub-
processes (FMEA)
5.Identify key measures inside and outside of the process
6.Collect data
7.Monitor, using dashboards and control charts. Search for
signals
8.Take action as required (DMAIC, Lean, DFSS or other)
•Inside Out:
A Way Forward
1.Inventory all processes
2.Identify those presenting the greatest risk
3.Identify the sub-processes that lie behind the risk (process
hierarchy)
4.Perform risk analysis on the key processes and sub-
processes (FMEA)
5.Identify key measures inside and outside of the process
6.Collect data
7.Monitor, using dashboards and control charts. Search for
signals
8.Take action as required (DMAIC, Lean, DFSS or other)
28
Further Questions / Information:
Lori Marin
Telephone: 312-381-4420
Email: [email protected]
Questions?
Further Questions / Information:
Lori Marin
Telephone: 312-381-4420
Email: [email protected]
Questions?
29
30
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