Quantification of regulatory capital for management of operational risk in banks: study from an emerging market economy

Operational risk is inherent in all banking products, activities, processes and systems. India’s banking sector has experienced a paradigm shift due to globalization and deregulation, which has led to the wider use of technology in product distribution channels and banks’ service delivery mechanisms. As a result, banks have become exposed to various types of operational risks, and the impact on the banking industry has been complex, diverse and catastrophic. This paper studies the various methodologies used by an Indian bank in its operational risk management activities: these include loss database analysis, risk control self-assessment and key risk indicator (KRI) identification. The study is based on both primary and secondary data on a public sector bank in India. This paper helps to identify which loss event types are more frequent and severe and shows how to categorize bank branches based on their risk profiles and KRIs.