Six trends from the ORX Scenarios library in 2019

Each year, firms that subscribe to ORX Scenarios upload their ten most severe scenarios to a library, creating a unique industry database. Since 2017, institutions have submitted more than 1,100 scenarios, including risk drivers and cost components, to this library, which can be used by firms to help create, update and validate their scenarios. Here are the six top trends we noted from the library this year.

1. Processing error scenarios are persisting

Processing errors is the second-largest category in the ORX Scenarios library. This category refers to human errors, and the descriptions observed in the library contain references to manual processing errors, such as incorrect payment data input, or not executing trades on time. One-third of these scenarios are linked to payment and cash management, revealing that human errors in this process can cost the firm a large amount of money.

2. The rise of model risk

Model risk is an increasing focus for financial institutions, perhaps due to a greater regulatory focus and the increase in model risk being recognised as a standalone risk type. In our recently published Reference Taxonomy, model risk is now represented at level 1.

This shift is reflected in the increase of scenarios linked to model errors being submitted to the ORX Scenarios library. These scenarios are primarily about data migration and management, model implementation errors, and misuse or misapplication of models.

3. Contemporary loss events drive scenario creation

In many cases, the occurrence of major operational risk loss events outside of the firm influences scenario identification and creation. Institutions look to the external environment to understand if a recent event at one of their peers could also happen to them. To support this process, organisations can use a service like ORX News to understand the global risk landscape.

4. No scenarios which ‘break the bank’ created

None of the estimated scenario severities in the library exceed a firm’s total gross income. In other words, a single “break the bank” scenario has not been developed by any of the participating institutions. This could be because developing a break the bank operational risk scenario is very challenging, as was shown in our recent ICAAP methodology study. Even when doing it to comply with regulatory requirements, institutions struggle to reach such high severities.

5. Scenarios reflect top current concerns for financial institutions

Our annual report on current and emerging operational risks ranked information security (including cyber), conduct and fraud as the top risks in 2019 and beyond. Correspondingly, cyber and conduct scenarios were the most submitted categories in the ORX Scenarios library. Almost a quarter of all the scenarios are linked to conduct risk, while 14 per cent are related to cyber.

6. Scenario analysis reflects levels of business change

The emergence of change as a key concern was highlighted by the recent study ORX undertook, where 16 CROs of leading financial institutions were interviewed to understand the risk-management of change. Scenario analysis can be used to identify potential events originating in business change, and this is present in some of the scenarios in our library. For example, some of the scenarios describe how losses materialise when firms change processes or systems, including human error, inadequate training and issues with IT systems.

Find out more in the summary report

For more analysis and insight into the ORX Scenarios library, read the summary report – Insights into material risks - an overview of scenarios shared in 2019.