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

    EBA Finalizes Templates for One-Off Climate Risk Scenario Analysis

    The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.

    November 28, 2023 WebPage Regulatory News

    EBA Mulls Inclusion of Environmental & Social Risks to Pillar 1 Rules

    The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.

    October 31, 2023 WebPage Regulatory News

    BCBS Consults on Disclosure of Crypto-Asset Exposures of Banks

    As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.

    October 19, 2023 WebPage Regulatory News

    BCBS and EBA Publish Results of Basel III Monitoring Exercise

    The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.

    October 18, 2023 WebPage Regulatory News

    PRA Updates Timeline for Final Basel III Rules, Issues Other Updates

    The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.

    October 18, 2023 WebPage Regulatory News

    US Treasury Sets Out Principles for Net-Zero Financing

    The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.

    October 17, 2023 WebPage Regulatory News

    EC Launches Survey on G7 Principles on Generative AI

    The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.

    October 14, 2023 WebPage Regulatory News

    ISSB Sustainability Standards Expected to Become Global Baseline

    The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.

    September 18, 2023 WebPage Regulatory News

    IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance

    Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.

    September 18, 2023 WebPage Regulatory News

    BCBS Assesses NSFR and Large Exposures Rules in US

    The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.

    September 14, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8938