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How to use op risk scenarios for more proactive risk management


At ORX we’re focusing on how to support financial organisations to become more proactive in their operational and non-financial risk management. One way they can do this is through operational risk scenario analysis.

The use of scenario analysis as a formal input for regulatory capital calculations over the past decade has been something of a double-edged sword. While it has forced the practice to mature, with increased governance, documentation and validation, scenario analysis has also become more time and resource-intensive. Anecdotally, we hear from our community that this has potentially hampered engagement from other areas of the business.

Scenarios to support forward-looking risk management

However, scenarios have the potential to offer real benefits to operational risk teams looking to enhance their proactive risk management. Scenarios are one of the few expressly forward-looking tools in the operational risk manager’s arsenal.

Through our continued conversations with the ORX membership on how they are managing risk in today’s digital environment, we are seeing them making more use of scenario analysis than ever before. One way they’re doing this is for operational risk teams to create and standardise a simple set of scenario inputs, allowing them to make a rapid assessment of a risk or situation.

Cutting down the process brings significant benefits

By cutting out the bureaucratic elements of traditional scenario analysis, financial firms can create a much quicker exercise allowing them to leverage the benefits of the practice to support active risk management.

A real-life example of this that we heard from our members in recent LeadersConnect sessions, where senior risk professionals get together to discuss strategic challenges and solutions, was for firms to use this slimmed-down approach to scenario analysis to allow them to dynamically test business continuity during the pandemic.

What does the future hold for scenario analysis?

In a recent white paper, Operational Risk Scenarios: From Risk Measurement to Risk Management and Beyond, we looked at what the future holds for scenario practice and how it can move from its original use for capital calculation to support risk management. The white paper is available for to download for free.

Looking to enhance your scenario programme?

In addition to ORX Membership, we also offer a subscription service dedicated to supporting operational risk scenario practitioners. ORX Scenarios gives you the tools and information you need for a comprehensive scenario programme, while also giving you the opportunity to become part of a global network of scenario experts.

Subscribing to ORX Scenarios means you can access a library of almost 1,000 scenarios created by other financial firms worldwide and a wide range of resources all designed to enhance and support scenario practice. As well as this, you can join regular working group meetings and forums to networks with your peers from around the world.