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COVID fails to stop fall in operational risk losses reported by global banks

2020 global loss reporting figures published by operational risk association ORX reveal a decline across the banking community, despite the impact of COVID-19. In the face of a challenging year, all three headline operational risk loss metrics still showed sizeable downward trends.

Lower total gross loss of events 

Total gross loss was €16.7bn in 2020, showing a downward trend of an average €2.4bn per year, and a drop of €12.1bn total gross loss between 2015 and 2020.  

Lower total number of events 

Annual loss frequency was notably lower, with 48,960 loss events, which is a 14,294 decrease in 2020 compared to 2019 and around 23% less than the average annual frequency of 63,350. Potential impacting factors include a changing risk landscape due to Coronavirus and fewer (typically small) events reported in Latin America and the Caribbean region.

Lower operational risk loss as a percentage of income 

Gross loss as a percentage of income has decreased over the years since 2015. The lowest value is 2020 at 1.3% and the last three years have been very stable with only 0.07% variation.

Impact of the pandemic

Coronavirus losses, which are defined as losses that would not have been experienced without the pandemic, accounted for €2.1bn (12.5%) of the total gross loss in 2020 and the median size of a coronavirus loss was €142k.

The pandemic affected different banking business lines in different ways. Unsurprisingly, more than half of coronavirus losses reported were in the corporate items business line, totalling €1.2bn (losses reported as corporate items are experienced at a centralised firm level, rather than affecting specific revenue-generating lines of business). 

Commercial banking and retail banking were the business lines that saw the next largest impact from coronavirus, with a total of €767.9m total gross coronavirus loss. As expected, disasters and public safety was the event type that sat the most coronavirus-related losses, with a total of €1.5bn - a significant increase on the 2015-2019 average of €799.1m.

"Many predicted we would see an upward swing in operational risk loss numbers for 2020, but actually what these figures show is that despite an extremely turbulent and unpredictable twelve months, our global financial institutions have good risk management strategies and processes in place to weather the storm," commented Dr Luke Carrivick, director of Research & Information at ORX. "What is noteworthy are the pattern of losses, which appears to be a little different, suggesting a changing risk profile. It will be interesting to see how much of this change continues in the coming years. We are aware that these numbers are only indicative at this moment in time as some events occurring may yet to be discovered, fully realised or reported, but it is reassuring nonetheless. The challenge moving forward as always is to learn from the last 12 months and improve risk management practices even further for the future."

Losses by geographical region

Comparing 2020 with the average for 2015 to 2019, gross operational risk loss and frequency of losses decreased in all ORX regions, except for Asia-Pacific. 

Asia-Pacific witnessed a substantial increase in external fraud due to a handful of very large losses and without these, Asia-Pacific’s gross loss as a region would be lower than in recent years. 

Latin America and the Caribbean had a notably lower frequency of events in 2020. Employment practices & workplace safety and clients, products & business practices event types make up a large proportion of this decrease (5,920 and 4,796 events, respectively). Consequently, there was also a large decrease in gross loss in the region, previously averaging at €1.5bn between 2015 to 2019, dropping to €931m in 2020. 

North America witnessed substantial reductions in clients, products and business practices (€4.1bn), which contributed the most to the €4.6bn decrease in total gross loss. There was also an 87% increase in disasters and public safety. However, this increase was relatively low at €324m, and so not enough to offset the decrease in gross loss seen across all other event types.

Western Europe saw disasters and public safety, and external fraud increase by €851m and €801m respectively. However, losses in clients, products and business practices decreased by €3.3bn in 2020, compared to the average of 2015-2019. Overall, Western European operations have seen a €1.3bn reduction in total gross loss.

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