Managing Operational Risk
First published:
ISBN: 9781782722861
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New Technology: Changing Business Models and Risk Profiles
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
“We always overestimate change that will take place in the next 2 years and underestimate the change that will occur in the next 10 years.”
Bill Gates, former CEO of Microsoft
New technology is a double-edged sword. Technology obviously allows greater efficiency and also provides new insights into customers and staff members alike. Increased automation, however, may obviously shift a firm’s operational risk profile from day-to-day manual processing errors to more systematic and potentially catastrophic tail-event risks, while disruptive technologies may also facilitate new market entrants and changes in customer behaviours, with associated downward pressures on margin. Finally cyber-criminals can be very professional and are endlessly innovative.
BENEFITS OF NEW TECHNOLOGY
The death of open outcry
During the author’s working life there has been a migration from open outcry and voice trading to electronic trading. For example, when the London International Financial Futures Exchange (LIFFE) was founded in 1982, its futures contracts were traded in outcry pits, using arcane hand signals, which were recorded by video, in case of dispute. During the mid, to late 1990s
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