Risk Management in e Banking_2

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RISK MANAGEMENT IN E-

BANKING


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An Introduction to E-Banking

Electronic banking is one of the truly widespread avatars of E-

commerce the world over. Various authors define E-Banking differently

but the most definition describe the meaning and features of E-Banking

are as follows:

Banking is a combination of two, Electronic technology and Banking. Electronic Banking is a process by which a customer performs

banking Transactions electronically without visiting a brick-and-

mortar institutions.

E-Banking denotes the provision of banking and related service

through Extensive use of information technology without direct

recourse to the bank by the customer


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Risk Managementis the process of measuring or assessing the actual

or potential dangers of a particular situation.

Risk managementis the process of monitoring and addressing the

potential for loss

AN INTRODUCTION TO RISK
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Operational Risk

Reputational Risk

Credit Risk

Legal Risk

TYPES OF RISK IN E-BANKING


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The risk of loss resulting from inadequate or failed internal processes,

people and systems, or from external events.

OPERATIONAL RISK


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Internal Fraud.

External Fraud.

Employment Practices and Workplace Safety.

Clients, Products and Business Practices.Damage to Physical Assets.

Business Disruption and System Failures.

Execution, Delivery and Process Management.

OPERATIONAL RISKS INCLUDE


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Unauthorized Activity.

Transactions not reported.

Transaction type unauthorized.

Mismarking of position.

Theft and Fraud.Fraud/credit fraud/worthless deposits.

Theft/extortion/embezzlement/robbery.

Misappropriation of assets.

Forgery.

Account take-over/impersonation.

Bribes/kickbacks.

Insider trading.

Money laundering.

Willful blindness.

INTERNAL FRAUD


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Employee training.

Close management oversight.

Segregation of duties.

Employee background checks.

Procedures and process.

Purchase of insurance.

Exiting certain businesses.Capitalization of risks.

OPERATIONAL RISK CHECKLIST


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Risk due to an uncertainty in a counterpartys ability to meet its

obligations in accordance with agreed upon terms.

CREDIT RISK


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Loans.

Acceptances.

Interbank transactions.

Trade financing.Futures.

Swaps.

Equities.

Letters of credit.

Options.

CREDIT RISKS INCLUDE:


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Establish an appropriate credit risk environment.

Operate under a sound credit-granting process.

Maintain an appropriate credit administration, measurement and monitoring

process.

Ensure adequate controls over credit risk.

SOUND PRACTICES FOR MANAGING

CREDIT RISK


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Board of Directors should review credit risk strategy periodically.

Senior management should implement credit risk strategy approved by theBoard.

ESTABLISH AN APPROPRIATE

CREDIT RISK ENVIRONMENT


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Criteria should include thorough understanding of the borrower,purpose/structure of credit and its source of repayment.

Establish overall credit limits at the level of individual borrowers/connected

counterparties.Have a clearly established process for approving new credits/extension ofexisting credits.

Extension of credit must be made on an arms length basis.

OPERATE UNDER A SOUND

CREDIT GRANTING PROCESS


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Have in place a system for ongoing administration of various risk-bearingportfolios.

Develop an internal risk rating system for managing credit risk.

Have an information system and analytical techniques that enablemanagement to measure credit risk of on/off balance sheet activities.

MAINTAIN A CREDIT

ADMINISTRATION, MEASUREMENT

AND MONITORING PROCESS


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System for monitoring overall composition and quality of the credit portfolio.

Consider future changes in economic conditions when assessing individualcredits.

MAINTAIN A CREDIT

ADMINISTRATION,

MEASUREMENT AND

MONITORING PROCESS(CONTINUED)


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System of independent, ongoing credit review.

Credit granting function is properly handled and credit exposures are withinlimits.

System for managing problem credits.

ENSURE ADEQUATE CONTROLS

OVER CREDIT RISK


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Reputational risk is the potential that negative publicity, whether true or

not, will result in loss of customers, severing of corporate affiliations,

decrease in revenues and increase in costs.

REPUTATIONAL RISK


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Improving relations with shareholders.

Creating a more favorable environment for investment.

Recruiting/retaining the best employees.

Reducing barriers to development in new markets.

Securing premium prices for products.

Minimizing threats of litigation.

BENEFITS OF EFFECTIVE

REPUTATION MANAGEMENT


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The key to managing reputational risk is soundrisk management, coupled with

straightforward communication about the problem the bank is facing.
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Re-establishing a firmsreputation takes a long time.


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PerrierToluene traces.

ExxonValdez spill.

Union CarbideBhopal, India.

Arthur AndersenEnron shredding.

FirestoneTires.

REPUTATIONAL RISK CASES


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Processes for crisis management are planned and documented.

External perceptions of the bank are regularly measured.

Reputational threats are systematically tracked.

Employees are trained to identify and manage reputational risks.

Standards on environmental, human rights and labor practices are setpublically.

Relationships and trust with pressure groups and other potential

critics are established.

REPUTATIONAL RISK CHECKLIST


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Legal Risk can also arias from e-banking. Virtual can potentially expand thegeographical scope of their services faster then traditional bank. In somecases however, the banks might not be fully prepared and lack sufficient

resources to become entirely familiar with the local laws and regulationsbefore they begin to offer services in new jurisdiction.

LEGAL RISK


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Emerged as a discipline during the early 1990s.

Used long before (1960s).

Typically used to describe techniques for addressing insurable risks.

EVOLUTION OF RISK

MANAGEMENT

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Risk Management in e Banking_2