–Operational Risks: Introduction

Professor
Department of Management Studies
School of Business Studies
University of Kashmir,Srinagar-6
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Question .1- The consolidated details of Thankless Bank are given hereunder for a period of
preceding 3 years: (Amount in Millions

Particulars/Year CF RB CB TS PS AS AM RB MS

Net Interest Income :

2014-15 28.0 22.0 6.0 4.8 2.4 2.4 1.2 7.2 6.0
2015-16 25.0 20.0 5.0 4.0 2.2 2.2 1.1 7.0 5.0
2016-17 22.8 18.2 5.0 4.0 2.0 2.0 1.0 6.0 5.0
Other Incomes :
2014-15 - - - 10 5.2 5.2 2.6 16 13
2015-16 - - - 5.6 2.8 2.8 1.4 8.4 7.0
2016-17 - - - 9.0 4.5 4.5 2.0 14 11
Operating Expenses:
2014-15 6.0 4.8 1.2 1.2 0.6 0.6 0.3 1.8 1.5
2015-16 3.6 2.9 0.7 0.7 0.4 0.4 0.2 1.0 0.9
2016-17 4.5 3.6 0.9 0.9 0.5 0.5 0.2 1.4 1.0
Beta factors (percent) 18 12 15 18 18 15 12 12 -
Additional Information:
• Profit and (Loss) on sale of securities is 2 million (loss), 2
million (profit) and 5 million (loss) for the years 2014-15,
2015-16 and 2016-17 respectively.
• Other income give in above table are before any adjustments
made for profit and loss on account of sale of securities. The
CF, RB, CB, TS, PS, AS, AM, RB and MS represents
Corporate Finance, Retail Banking, Commercial Banking,
Trading and Sales, Payment and Settlement, Agency Services,
Asset Management, Retail Brokerage and Miscellaneous
Services.
• Compute capital charge for operational risks under “The
Standardized Approach” for the bank and also compute risk
weighted assets for operational risk, if the capital adequacy
ratio is 9 percent.
Question: Standardized Approach
The consolidated details of the income statement of the Federal Bank for last
three years are given below:
Particulars Amount Particulars Amount
(Millions of ) (Millions of )
Net Interest Income: Operating Expenses:
2014-15 80 2014-15 20
2015-16 72 2015-16 12
2016-17 65 2016-17 15
Other Incomes: Extra ordinary incomes or
2014-15 50 (losses):
2015-16 30 2014-15 3
2016-17 40 2015-16 Nil
Profit and (Losses) on sale of 2016-17 (2)
securities:
2014-15 (5)
2015-16 2
2016-17 (3)
Additional Information:
• 70 percent of the Net Interest Income (NII) is derived from the business lines of
Corporate Finance (CF), Retail Banking (RB) and Commercial Banking (CB) and 30
percent from remaining business lines of Trading and Sales (TS), Payment and
Settlement (PS), Agency Services (AS), Asset Management (AM), Retail Brokerage
(RB) and Miscellaneous Services (MS). The other income is derived by bank only
from TS, PS, AS, AM, RB and MS business lines.
• 40 percent of the operating expenses are incurred on the three business lines of CF,
RB, and CB , while as 60 percent are incurred on remaining business lines
• The ratio for distribution of NII is CF:RB:CB::5:4:1, while ratio for distribution of 30
percent NII for remaining business lines is TS:PS:AS:AM:RB:MS::4:2:2:1:6:5.
Further net other income be distributed on similar basis between remaining business
lines.
• The amount of “other incomes” is net of profit and losses on sale of securities and
extra ordinary items.
• The beta factors are 18%, 12%, 15%, 18%, 18%, 15%, 12% and 12% for CF, RB,CB,
TS, PS, AS, AM and RB respectively.
• Compute the capital charge for operational risks under “The Standardized Approach”
for Federal Bank and also calculate risk weighted assets for operational risk, if the
capital adequacy ratio is 9 percent.
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 Following are details of the Ram Rattan Bank for the year ending 31st March, 2018,
Compute the risk weighted assets, amount of capital funds and risk weighted capital
adequacy ratio of the bank and comment on the ratio, if the prescribed ratio is 9%.

Particulars Amount Particulars Amount

(Millions of (Millions of
Rs.) Rs)
Paid up equity capital 80 Cash in hand and Balance with RBI 20
Statutory Reserves 30 Balance with other banks
Capital Reserves 40 Investment in approved securities 30
Other Disclosed Free Reserves 70 of Central Government 150
Undisclosed Reserves 30 Loans granted to public sector
Revaluation Reserves 40 undertakings of govt. of India 40
General Provisions and Loss 50 Leased assets 30
Reserves Furniture and fixture 50
Hybrid Debt Capital Instruments 20 Premises 50
Subordinated Debts: Other fixed assets 75
 Maturity is above 5 years 30 Letters of credit 10
 Maturity is between 3 years and 30 Acceptances and Endorsements 10
4 years 10 Other Risk Weighted Assets:
 Maturity is within 1 year  Market Risk 600
Equity Investments in Subsidiaries 10  Operational Risk 900
Intangible Assets 05
Current and Accumulated Losses 05
Thank You