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b) External factors: Changes in banking industry, regulatory policies, technological advances etc.

* A bank's material products, activities, processes and systems, especially those related to new products, should be subjected to comprehensive assessment based on their “inherent risks”.

* Internationally recognized assessment tools of operational risk in a bank's activities are as given below:

a) Self risk assessment: Against a menu of probable and violent risk vulnerabilities, a bank's operations and activities are assessed as an internally driven tool. Scorecards that identify strengths and weaknesses are developed for the purpose.

b) Risk mapping: Various products/ business lines, organizational functions, processes are mapped out based on the risk type. Weak areas are spotted out and remedial management action is initiated.

c) Use of statistics and/or metrics: Risk indicators located on the basis of statistics and /or metrics in respect of failed trades, staff turnover, severity of errors and omissions are analyzed and appropriate control mechanism is establish.

d) Quantification: Operational losses can be quantified on the basis of systematic tracking and recording of the frequency, severity etc. for individual loss events. This can be combined with external loss data, along with scenario analysis.

5. Processes necessary for assessing operational risk should be established.

Following aspects are important in complying within this principle:

* Monitoring system for operational risk should be effective in quickly detecting and correcting deficiencies in the policies frequency and/or severity of events that are likely to generate loss.

* Early warning of future losses should be incorporated which should be forward looking and should reflect potential sources if operational risk areas.

* Spotting potential risk areas demands a systematic and ongoing evaluation system. Following general risk areas must be looked into:

a) Rapid business/product growth.

b) The need to frequently introduce new or innovative products.

c) Rapid employee turnover.

d) Transaction breaks

e) System down time.

* Operational risk reports should be generated regularly for the perusal of senior management and board of directors. Such risk reports should contain all the aspects that have severe operational risk implications.

6. Systems should be implemented to monitor operational risk exposures and loss events by major business lines.

Following aspects are important in complying with this principle:

* Material operational risks in a bank must be controlled and/or mitigated through approached policies, processes and procedures.

* The bank's strategies are reviewed periodically, keeping in view its overall risk appetite and profile.

* The basic aspect to be followed is to decide:

a) Nature of risks to be controlled.

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