Future of loss information
- 6 July 2017
It’s evident that operational risk as a discipline is stepping up to the challenge of improving risk management information.
So, throughout 2017 we conducted a study on how loss information could evolve to meet the changing requirements of operational risk management. Our objective was to identify ways to increase the risk management value of external loss information and better map external loss data to the business and risks.
With input from more than 40 of our banking members, the study reinforces that there is appetite for an external perspective, an opportunity for change, and new ideas – but there is also recognition of the value in the information that has been collected and shared in the past, which we can build on.
Why did we need to review loss information?
Our members told us that they need improved operational risk management information and reporting. Historically, frameworks have focused on regulatory requirements for calculating capital and reporting, and subsequently are not necessarily providing management with the granular, forward-looking and comparative information they need to support effective decision making.
Furthermore, the current ORX banking loss data reporting standards are based on a standard developed by Basel as part of the initial work on creating a framework for the capital charge. The pending introduction of the Standardised Measurement Approach (SMA) removes the requirement (of many banks) for external loss data to calculate Pillar 1 capital.
We did the Future of Loss Information study to help our membership meet these challenges. We explored what data is being exchanged currently, how it is being used and what changes can be made to make this more useful.
Collaborating with our membership
Working closely with interested members we reviewed the evolution of the existing loss information services and researching the offerings of our peers and competitors. We developed a vision for future services that would offer the exchange of information more relevant to risk management and benchmarking.
We expect that future services will contain information that is more forward-looking, more closely aligned with risk exposures and linked to management actions. This may mean that the set of variables exchanged will be dependent on the specific risk or business line in question, allowing far more relevant and targeted information to be shared.
Key stages of the project
In the first stage of the research project, we held discussions with a representative set of 26 ORX members. They shared their thoughts on loss data information sharing in the future for regulatory, measurement and especially management purposes.
The feedback we received from these meetings contributed to a discussion paper. The paper was presented at the 2017 HORF, outlining the problems members experience and predict with the existing information exchange. It set out for consideration a set of concepts for future information sharing.
Session at Heads of Operational Risk Forum 2017
Based on discussions with 26 members, a draft report contributed to an interesting panel discussion and plenary session at the 2017 Heads of Operational Risk Forum. Key points discussed included:
- As the industry moves away from capital calculation members need to focus more on developing common standards and approaches
- We need to consider developing definitional standards and focusing more on specific risks
- Moving beyond collecting loss data in its current form and towards sharing the information needed for explaining, rather than just describing losses
- ORX is in a unique position to leverage the know-how of the industry
These concepts formed the basis for the broader survey of our members.
Future of loss information survey
Our members were invited to complete the survey to assess what loss information members could exchange to:
- improve the risk management value of external loss information
- enable closer alignment of external loss information to the business and risks
The results of the survey provided valuable input into the roundtable and conference call discussions.