Managing Operational Risk
First published:
ISBN: 9781782722861
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Backtesting to the Mid-1990s and Conclusions
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
“Nothing in life is so exhilarating as to be shot at without result”
Winston Churchill, twice British Prime Minister during the 20th century
Looking back over the last 20 years or so is an informative way to consider the extent to which the emerging threats facing the industry have changed, and also the relative success of the responses of prior generations of politicians and bankers.
REGULATORY CHANGE: COMPLEXITY
In the late 1980s and early 1990s the regulatory landscape in the UK was very complex, comprising the Bank of England, the London Stock Exchange and the Building Societies Commission, as well as a number of self-regulatory organisations, such as the Investment Management Regulatory Organisation (IMRO), the Personal Investment Authority (PIA) and the Securities and Futures Authority (SFA). In May 1997 the then Chancellor of the Exchequer announced the consolidation of the regulatory activities of these bodies into the Securities and Investments Board, which was renamed the Financial Services Authority (FSA). The FSA was subsequently split in 2012 into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
A key difference, however
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