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- Create Date May 12, 2021
- Last Updated December 22, 2021
If accumulations of exposure to operational risk are allowed to escalate to a tipping point because there is no risk quantification method that makes them visible to boards and C-suite executives, unexpected losses will be the inevitable outcome.
The misguided or fraudulent activities of rogue traders, the payment protection insurance (PPI) misselling scandal in the UK, JPMorgan Chase’s London Whale, and the subprime fiasco of the noughties, all demonstrate that such losses can be extreme and capable of putting a severe dent in, or even wiping out shareholders’ equity. In the banking sector, the regulatory response to this lamentable situation is to force banks to maintain eyewatering levels of inert, unproductive, and costly capital to buffer such unexpected losses irrespective of the effectiveness of banks’ management of these risks.