The book is structured around the following three questions:
1. Why did banks suffer such large operational risk losses during the financial crisis?
2. What is going to cause banks to suffer large operational risk losses again in the future?
3. What should operational risk managers do differently?
It will answer these questions in three sections: the first analyses the drivers behind a series of large operational risk losses; the second sets out potential future threats by examining existing trends, past patterns, and parallels with other industries; the third looks at how operational risk management frameworks can better equip firms in order to avoid repeating the mistakes of the past.
- Three Historical Spikes in Operational Risk Losses
- First Order Effects: Transforming Credit Defaults and Market Turmoil into Operational Risk Losses
- Second Order Effects: Transforming Rising Unemployment and Falling Interest Rates into Operational Risk Losses
- Regulatory Change: The Costs and Consequences
- Macroeconomic Threats: Tax Issues and Eventually Rising Interest Rates
- New Technology: Changing Business Models and Risk Profiles
- Aligning Operational Risk Management Frameworks to Appetites
- Estimating Exposures to Tail Events
- Solutions for a Triumvirate of Seemingly Intractable Problems
Part I: What were the Root Causes of the Unprecedented Spike in Operational Risk Losses after the Global Financial Crisis?
1. Three spikes in Operational Risk losses
2. First-Order effects: Transforming Credit Defaults and Market Turmoil into Operational Risk Losses
3. Second-Order effects: Transforming Rising Unemployment and Falling Interest Rates into Operational Risk Losses
4. Conclusions and Root Causes
Part II: What are the New and Emerging Operational Risk Threats?
Introduction to Part II: What are the new and emerging Operational Risk threats?
5. Regulatory change: Part of a Perfect Storm
6. Macroeconomics Threats: Tax, Rising Interest Rates and New Asset Bubbles
7. New Technology: Changing Business Models and Risk Profiles
8. Three Horseman: Societal, Political and Environmental change
9. Backtesting to the Mid-1990s and Conclusions
Part III: What Lessons can the Profession Learn?
Introduction to Part III: What Lessons can the Profession Learn?
10. Defining and cascading Operational Risk appetites
11. Aligning Operational Risk Management Frameworks to Appetites
12. Estimating Exposures to Tail Events
13. Solutions for a Triumvirate of Seemingly Intractable Problems
Appendix 1: The Chronology of the LIBOR Scandal
Appendix 2: Some Examples of Common Scenarios
Appendix 3: Mapping of Reputational Risk incidents to Operational, Conduct and Business Risks
Michael won a scholarship to Oxford to read zoology, and following graduation trained as a chartered accountant, before moving into consultancy, initially working on process improvement projects. Overlaps between the drivers of process inefficiency and operational risk led him to undertake his first operational risk management project in the mid-1990s, when working for what is now PwC Consulting. By the start of the new millennium, however, his disenchantment with the apparent lack of demonstrable commercial value provided by operational risk management prompted a brief return to cost reduction and process improvement.
Following the finalisation of Basel II in 2004, Michael moved back to operational risk management, initially as Operational Risk Director for Lloyds TSB's Wholesale & International Division, and subsequently as Head of Operational Risk & Compliance for the ~300 RBS and NatWest branches that are currently being spun-off as Williams & Glyn.
Operational risk management continues to evolve as a profession, and Michael has recently focused on sharing good practice via industry seminars, conferences and as a contributor to the Institute of Operational Risk’s ‘Sound Practices Guides’. In 2014, Michael’s efforts were recognised by the Institute, when he received an award for his 'Contribution to the Discipline of Operational Risk Management', primarily for his work on techniques for conducting and validating scenario analysis. In 2015 he was elected to the Board of the Institute, as Director with Portfolio for Regulatory & Industry Bodies.
Michael lives in West London with his wife Karen, his two daughters Charlotte and Olivia, and Cat. Unsurprisingly, his daughters find animals somewhat more interesting than operational risk.