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

    HKMA Publishes Hong Kong Taxonomy for Sustainable Finance

    The Hong Kong Monetary Authority (HKMA) published the Hong Kong Taxonomy for Sustainable Finance.

    May 21, 2024 WebPage Regulatory News
    News

    EU Taking Steps to Set Out and Enforce AI Regulations

    Many believe that the transformative power of generative artificial intelligence (GenAI) has potential to reshape the financial sector in the time to come.

    May 21, 2024 WebPage Regulatory News
    News

    ISSB Releases Digital Sustainability Disclosures Taxonomy

    The themes of the harmonization and interoperability of sustainability disclosure standards among various jurisdictions remain at the top-of-mind for international standard-setting bodies.

    May 21, 2024 WebPage Regulatory News
    News

    BCBS Report Studies Implications of Digitalization of Finance

    The Basel Committee on Banking Supervision (BCBS) published a report that examines the implications of the digitalization of finance for banks and supervisors.

    May 21, 2024 WebPage Regulatory News
    News

    BCBS Consults on Guidelines for Counterparty Credit Risk Management

    The Basel Committee on Banking Supervision (BCBS) is seeking comments, until August 28, 2024, on guidelines for counterparty credit risk management of banks.

    May 21, 2024 WebPage Regulatory News
    News

    BIS Paper Outlines Vision for Future Financial System

    In a recent paper, the General Manager of Bank for International Settlements (BIS) and the Indian entrepreneur (Infosys co-founder) Nandan Nilekani have laid out a vision for the Finternet, which is proposed to be a network of multiple financial ecosystems, much like the internet.

    April 29, 2024 WebPage Regulatory News
    News

    NGFS Outlines Options for Supervisory Review of Transition Plans

    The Network for Greening the Financial System (NGFS) recently published three reports on the use of transition plans to boost sustainable finance and manage climate-related financial risks.

    April 29, 2024 WebPage Regulatory News
    News

    BCBS Issues Discussion Paper on Climate Scenario Analysis

    The Basel Committee on Banking Supervision (BCBS) issued a discussion paper on the use of climate scenario analysis to strengthen the management and supervision of climate-related financial risks.

    April 29, 2024 WebPage Regulatory News
    News

    OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.

    April 25, 2024 WebPage Regulatory News
    News

    CFIT to Chair Open Finance Taskforce Announced by UK Government

    The UK government announced the formation of an industry-led Open Finance Taskforce, chaired by the Center for Finance, Innovation, and Technology (CFIT).

    April 25, 2024 WebPage Regulatory News
    RESULTS 1 - 10 OF 8967