Machine learning in operational risk white paper

Making a business case for its practical implementation

We believe that the application of advanced analytics, including machine learning and artificial intelligence (AI), will be a core part of any future strategy for the management of operational and non-financial risk. This paper focuses specifically on the opportunities that machine learning can offer

About the white paper

The purpose of this white paper is to make a case for the use of advanced analytics, and specifically machine learning techniques, for operational risk management in financial firms. It lays out the opportunities that ORX believes lie in the use of these techniques, and provides information on how they can be integrated into day-to-day operational risk management activities.

The white paper is divided into four sections. The first describes the role that we believe machine learning techniques will play in operational risk measurement and management. This is followed by the key opportunities that we see in their application. The third section contains example use cases that we have collected from the ORX Machine Learning Working Group (MLWG), a group of ORX member institutions that are already successfully applying these techniques. The final section addresses what we see as the key considerations that financial firms, and the operational risk discipline more generally, will need to address in order to make greater use of machine learning.

Advanced analytics – a potential game changer

In 2017, ORX conducted a study interviewing 15 Chief Risk Officers (CROs) on the future of operational risk. Many of the interviewees identified advanced analytics (beyond capital modelling and stress testing) as a potential game changer for operational risk management. Around half earmarked it as a priority for innovation and investment over the next five years.

However, despite its huge potential machine learning has remained largely unexplored by operational risk. In a recent literature review of the application of machine learning in risk management, only six out of 50 papers focused on operational risk management.

A core part of future op risk strategy

We believe that the application of advanced analytics, including machine learning and artificial intelligence (AI), will be a core part of any future strategy for the management of operational and non-financial risk. This paper focuses specifically on the opportunities that machine learning can offer. It is intended for operational risk functions who are beginning to explore using these techniques, and want to make a business case for their application.

The five opportunities for op risk

Based on conversations with ORX member institutions, we identified five areas in which we believe operational risk functions will benefit from the use of machine learning:

1. Freeing up valuable resources
2. Gaining deeper insights into data
3. Supporting business needs effectively
4. Gaining the skills for an enhanced level of challenge
5. Benefitting from economies of scale

Read the full white paper to find out more about how machine learning could be used to help manage and measure operational risk.