BIS Paper Analyzes Operational and Cyber Risks in Financial Sector
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
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
SRB Chair Outlines MREL Expectations from Banks Amid COVID CrisisRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.