[OR] [RBI] [1] Preliminary – Introduction and Background

Introduction to RBI's Guidance Note on Operational Risk Management and Operational Resilience

This comprehensive document marks a significant step in fortifying the financial stability of banks and financial institutions, drawing from global best practices and lessons learned from past crises.

Background and Rationale

The global financial crisis underscored the need for robust financial resilience mechanisms. Despite improved capital and liquidity requirements, the Basel Committee on Banking Supervision (BCBS) identified a critical need for enhanced Operational Risk Management (ORM) to safeguard the financial system further.

Recognising Operational Risk as distinct from credit and market risks, BCBS issued sound practices in 2003. Later, after the Great Financial Crisis, it revised it in 2011 to address emerging challenges and gaps.

The onset of the COVID-19 pandemic brought new disruptions, amplifying risks related to information systems, personnel, facilities, and third-party relationships.

The spike in cyber threats and the shift towards virtual operations tested banks' operational resilience, emphasizing the need for an updated approach to ORM.

Evolution of Operational Risk Management Principles

In response to these evolving challenges, BCBS released updated 'Principles for the Sound Management of Operational Risk' in 2021, alongside new 'Principles on Operational Resilience'.

These updates aim to enhance banks' capabilities to withstand, adapt to, and recover from significant operational disruptions, such as pandemics, cyber incidents, technology failures, and natural disasters.

Key Elements of the Guidance Note

Operational Risk is inherently complex and influenced by numerous internal and external factors, such as business processes, regulatory changes, customer preferences, and technological advancements.

The RBI's Guidance Note addresses this complexity by integrating Operational Risk Management and Operational Resilience, recognising their interdependence in reducing the frequency and impact of Operational Risk events.

The Guidance Note is built on three foundational pillars

Prepare and Protect

• Focuses on proactive risk identification, assessment, and mitigation.

Build Resilience

• Emphasises the ability to deliver critical functions amid disruptions.

Learn and Adapt

• Encourages continuous improvement through lessons learned from past disruptions.

These pillars create a holistic approach, fostering a feedback loop that ensures perpetual improvement in managing operational disruptions and enhancing performance during actual events.

Structure and Principles

The Guidance Note outlines 17 principles spanning these three pillars, providing a detailed framework for banks and financial institutions to bolster their Operational Risk Management and Resilience.

These principles can help institutions better prepare for, respond to, and recover from operational disruptions, ensuring continuity and stability in the financial sector.

Summing Up ...

In conclusion, the RBI's Guidance Note on Operational Risk Management and Operational Resilience represents a critical advancement in the regulatory landscape.

It aims to fortify the financial system against an array of operational risks. Financial institutions are encouraged to rigorously implement these guidelines to enhance their resilience and safeguard against future disruptions.

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