Featured Product

    BIS Paper Analyzes Operational and Cyber Risks in Financial Sector

    February 11, 2020

    BIS published a working paper that uses a unique cross-country dataset at the loss event level to document the evolution and characteristics of the operational risk of banks. The paper highlights that better supervision is associated with lower operational losses. It also provides an estimate of losses due to cyber events, which constitute a subset of operational loss events. Cyber losses are a small fraction of total operational losses, but can account for a significant share of total operational value-at-risk.

    Representing a significant portion of total bank risks, operational risks are second only to credit risks as a source of losses. Thus, measuring and understanding operational risks, including cyber risks, is critical for both banks and public authorities. The paper uses a unique cross-country dataset from ORX, which is a consortium of financial institutions. The sample contains over 700,000 operational loss events from 2002 until the end of 2017 for a group of 74 large banks with headquarters worldwide. The granularity of the dataset allowed the authors to study the evolution of operational risks through time, compute an operational and cyber value-at-risk for financial intermediaries, document the time lag between occurrence, discovery and recognition of losses, and investigate the link between operational losses, macroeconomic conditions, and regulatory characteristics.

    The results of the study show that, after a spike following the Great Financial Crisis, operational losses have fallen in recent years. The spike was largely due to losses arising from improper business practices in large banks that were incurred in the run-up to the crisis but recognized only later. Operational value-at-risk can vary substantially across banks—from 6% to 12% of total gross income—depending on the method used. These numbers are consistent with the actual capital requirements, but notably smaller than the basic indicator approach. The results provide some support for the shift to the standardized approach in Basel III.

    The analysis shows that it takes, on average, more than a year for operational losses to be discovered and recognized in the books. However, there is significant variation across regions and event types. For instance, improper business practices and internal fraud events take longer to be discovered. Operational losses are not independent of macroeconomic conditions and regulatory characteristics. The paper shows that credit booms and periods of excessively accommodative monetary policy are followed by larger operational losses. Furthermore, it is to be noted that a higher quality of financial regulation and supervision is also associated with lower cyber losses. Despite representing a relatively minor share of operational losses, cyber losses can account for up to a third of total operational value-at-risk.

     

    Related Links

    Keywords: International, Banking, Operational Risk, Value-at-Risk, Cyber Risk, Standardized Approach, Research, BIS

    Featured Experts
    Related Articles
    News

    FED Revises Capital Planning and Stress Testing Requirements for Banks

    FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.

    January 19, 2021 WebPage Regulatory News
    News

    ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020

    ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.

    January 19, 2021 WebPage Regulatory News
    News

    ESAs Publish Reporting Templates for Financial Conglomerates

    ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.

    January 18, 2021 WebPage Regulatory News
    News

    EBA Publishes Report on Asset Encumbrance of Banks in EU

    EBA published the annual report on asset encumbrance of banks in EU.

    January 18, 2021 WebPage Regulatory News
    News

    MAS Revises Guidelines on Technology Risk Management

    MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.

    January 18, 2021 WebPage Regulatory News
    News

    US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C

    FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.

    January 15, 2021 WebPage Regulatory News
    News

    EBA Proposes Guidelines for Establishing Intermediate Parent Entities

    EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.

    January 15, 2021 WebPage Regulatory News
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6462