Managing Operational Risk
First published:
ISBN: 9781782722861
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Conclusions and Root Causes
Conclusions and Root Causes
Introduction
Three Historical Spikes in Operational Risk Losses
First-Order Effects: Transforming Credit Defaults and Market Turmoil into Operational Risk Losses
Second-Order Effects: Transforming Rising Unemployment and Falling Interest Rates into Operational Risk Losses
Conclusions and Root Causes
Regulatory Change: Part of a Perfect Storm
Macroeconomic Threats: Tax, Rising Interest Rates and New Asset Bubbles
New Technology: Changing Business Models and Risk Profiles
Three Horsemen: Societal, Political and Environmental Change
Backtesting to the Mid-1990s and Conclusions
Defining and Cascading Operational Risk Appetites
Aligning Operational Risk Management Frameworks to Appetites
Estimating Exposures to Tail Events
Solutions for a Triumvirate of Seemingly Intractable Problems
Conclusions
“… for me the evidence of culture is how people behave when no one is watching.”
Bob Diamond, then CEO of Barclays, Today Business Lecture 2011
Analysing the losses that banks suffered during the global financial crisis suggests that the largest operational risk losses were linked to an increase in credit defaults and rising unemployment, for example, the litigation against the issuers and arrangers of mortgage-backed securities (MBSs), the penalties and compensation arising from inappropriate foreclosure and the mis-sale of payment-protection insurance (PPI).
Directional moves in markets also led to some operational risk losses, for example, losses from the mis-sale of derivatives by banks or “breaking the buck” for fund managers. The combination of a sensitivity to rising credit defaults, rising unemployment and directional moves in markets makes at least some types of operational risk losses cyclical, just like credit risk.
The most significant operational risk losses also seem to have been, more often than not, linked to the provision of services by the firms, eg, arranging the issuance of MBSs and collateralised debt obligations (CDOs), providing fund-management
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