Chapter 2 Flash Cards
What is the primary focus of governance in managing operational risk
The governance framework focuses on defining roles, responsibilities, and the structure for managing operational risk effectively within an organization
What are the key components of an operational risk governance framework?
Key components include the first, second, and third lines of defence, operational risk policy, risk culture, the ‘use test’, continuous review, and change management.
What role does the first line of defense play in operational risk management?
The first line of defense involves business units and operational functions managing risk directly, implementing controls, and ensuring risk-taking within defined limits
Describe the second line of defense’s role in operational risk management.
The second line includes risk management and compliance functions overseeing risk, developing policies, and advising the first line on risk matters
What is the third line of defense in managing operational risk?
The third line is internal audit, providing independent assurance on the effectiveness of risk management, controls, and governance processes
What is an operational risk policy?
It’s a formal document outlining the organization’s approach to managing operational risk, including strategies, processes, roles, and responsibilities.
How does risk culture influence operational risk management?
Risk culture refers to the norms and attitudes towards risk-taking and management within an organization, influencing how risks are identified, assessed, and mitigated.
What does the ‘use test’ entail in operational risk management?
It verifies that risk management tools and outputs are actively used in decision-making, risk assessments, and capital allocation processes
Why is continuous review and change important in operational risk management?
It ensures the risk management framework remains effective and relevant in light of changing internal and external environments.
What are the roles and responsibilities of the governing body in operational risk management?
The governing body oversees the entire operational risk framework, ensuring it aligns with strategic objectives and regulatory requirements.
How do external stakeholders impact operational risk management?
Stakeholders like regulators, investors, and customers have specific expectations and requirements that influence how operational risks are managed
What is the importance of clear roles and responsibilities in operational risk management?
Clear roles and responsibilities ensure accountability, effective risk management practices, and alignment with organizational objectives
Explain the significance of the risk governance framework’s interaction components.
These components facilitate coordination across the three lines of defense, ensuring comprehensive risk identification, assessment, and management
Describe the operational risk function’s roles and responsibilities
This function develops the operational risk framework, supports business units in risk management activities, and provides oversight and reporting
How does the operational risk management framework fit into the overall risk management strategy?
It integrates with the broader enterprise risk management (ERM) strategy, aligning operational risk practices with strategic risk management objectives.
