Systemic Operational Risk – Extreme Operational Losses

Patrick McConnell

This chapter introduces the topic of systemic operational risk, and recognises that systemic risks arise not just from credit and market risk factors. Instead, it will argue that operational risk must also be considered as a contributor, and in some instances a trigger, to systemic risk. Using the examples of very large losses suffered by the largest banks, the chapter will show that there is a systemic dimension to operational risk that should be recognised and addressed by banking regulators.

SYSTEMIC OPERATIONAL RISK EVENTS

The tables presented in this chapter demonstrate that there is a set of significant losses that have been incurred by SIFIs from multiple countries as a result of a range of scandals, here called systemic operational risks (SORs). As the case studies in Part II will show, these systemic risks fit the Basel definition of operational risk events and, importantly, have been viewed by major banking, securities and industry regulators as a single event. This is despite the fact that, for example, misconduct in the case of Libor occurred in many jurisdictions over a considerable period of time. Table 3.1 summarises the systemic operational losses that will be