Second-Order Effects: Transforming Rising Unemployment and Falling Interest Rates into Operational Risk Losses

Michael Grimwade

After the initial economic shock of rising credit defaults and falling markets, the subsequent waves of economic impact from the financial crisis included mounting unemployment and ultra-low and even negative interest rates. This chapter contains a further series of case studies to illustrate how these events, and the responses of firms, would lead to the creation or crystallisation of further operational risk losses.

PPI MIS-SELLING ABOVE US$45 BILLION

“Grabbing and greed can go on for just so long, but the breaking point is bound to come sometime.”¹¹“Lessons of a banking collapse, in Lehman’s terms”, Financial Times, September 14, 2010.

Herbert Lehman, shortly before he retired in 1957

Payment-protection insurance (PPI) is an insurance product that enables consumers to insure repayment of loans if they die, become ill or disabled, or lose their job. The insurance can be bought on a standalone basis or is more often linked to a specific unsecured loan. The premium historically would be either a single premium that was added to the value of the loan or a series of monthly payments.

Chronology of the UK’s largest operational risk loss

Early signs of systemic problems