ORX Operational Risk Report

June 2010

Introduction:
This is the fourth ORX Operational Risk Report. The report contains a high-level overview of the ORX global Operational Risk Loss Database and the high level trends in operational risk losses observed. This edition of the report summarises losses in the period 1 January 2004 up to 31 December 2009. Earlier editions of this report began at 1 January 2002. The two years that have been excluded represent almost 20,000 events of a total of 161,997 and 14Bn Gross Losses of a total of 55Bn. This reduced dataset will have an impact upon the results for Corporate Finance as the large events associated with Enron, WorldCom and others, that were recorded in 2002 & 2003, are now excluded. The dataset, used in this report, still covers over 5 years of losses. In the 2004-2009 period, ORX Members reported 142,293 loss events with a total value of 41,501Mn. Of these events 2009 contributed 27,053 loss events (19%) and 9,110Mn gross loss amount (22%). The report contains some charts relating to losses, on a quarterly basis, since the beginning of 2006. The series of charts beginning with Figure 11a, shows quarterly data of Gross Income, Gross Loss Amounts and Number of Loss Events since the beginning of 2006. This enables a view to be obtained as to the performance of Wholesale and Non-Wholesale business lines during the Financial Crisis. It is likely that some operational risk events, connected with the financial crisis, will take time to resolve and will be reported to ORX in the future. An example is events involving litigation. ORX is a not-for-profit industry association dedicated to advancing the measurement and management of operational risk in the global financial services industry. The association continues to act as a forum for the development of common operational risk standards, leading edge research and collective learning. ORX has recently conducted a survey of practices on the creation and use of Scenarios amongst its Members. This year Members will begin reporting additional attributes for losses. These additional attributes include Products and Processes as well as attributes specific to Large Loss Events. These attributes have been added to increase the value of the data to Members, in particular their business units. Other initiatives that are due to be implemented before the end of 2010 include sector databases, for example Investment Banking, a revised Scaling Model, a Capital Benchmarking exercise, and enhanced reporting to Members. To learn more about ORX please visit our web site at www.orx.org www.orx.org

Copyright Notice All rights in this document are owned and controlled by ORX. ORX permits it to be used internally and transmitted publically, in whole or in part. This permission is granted provided that, if any aspect of this document is incorporated into a public document, into material given to clients by consultant or into commercial products, its ownership by ORX is acknowledged appropriately. ORX has prepared this document with care and attention. ORX does not accept responsibility for any error or omissions. ORX does not warrant the accuracy of the advice, statement or recommendations in this document. ORX shall not be liable for any loss, expense, damage or claim arising from this document. The content of this document does not itself constitute a contractual agreement, and ORX accepts no obligation associated with this document except as expressly agreed in writing.

Operational Riskdata eXchange (ORX) 2010

Overview of ORX Data

Table 1 Overall Summary of ORX Annual Data (2004-2009)
Total 2004 2005 2006 2007 2008 2009

Total Number of Loss Events

142,293

16,113

18,226

22,120

23,953

34,828

27,053

Total Gross Loss ( Mn)

41,501

5,531

5,178

5,417

8,111

8,154

9,110

Average Loss per Event ()

291,659

343,263

284,100

244,1000

338,621

234,122

336,746

Table 1 provides an overall annual summary of the loss data reported to ORX since 1 January 2004. Table 2 has similar data, but on a quarterly basis from the beginning of 2007. As of 31 December 2009, the ORX global Database contained 142,293 individual loss events reported since the beginning of 2004. Each of these loss events has a value that is equal to, or in excess of, 20,000. In terms of the total Gross Loss reported to ORX for this period the sum is 41.5Bn. Of these figures 2009 accounted for 19% of the number of losses and 22% of the gross loss amount, slightly more than the 16.6% indicated for 1 year in 6. Some of the apparent increase in 2009 results may be due to the fact that ORX continues to add Members. One way to adjust for this is to consider the Gross Loss per Loss Event. For the 2004-2008 period the average Gross Loss per Loss Event is 281,074 as opposed to 336,746 for 2009, an increase of 20% in loss size. Some events that have been experienced by ORX Members during the financial crisis, such as litigation, may not be reported until resolution in the years ahead. As a result, in 2011 looking back at the 2009 reported Gross Loss Amounts may show an increase in comparison to the figures reported in Table 1 today.

Operational Riskdata eXchange (ORX) 2010

Visual Overview of ORX Data

Figure 1: Total Number of Events by Year (2004 - 2009)
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2004i 2005i 2006i 2007i 2008i 2009i

Total Number of Events 142,293

34,828 27,053

22,120 16,113 18,226

23,953

Figure 1 shows the total number of events reported by year. The chart shows a gradual upward trend that is interrupted by a spike in 2008. A factor that may be contributing to the trend is the increasing number of ORX Members. The spike in 2008 may be associated with the financial crisis and the risk environment in which Members operated.

Figure 2: Total Gross Loss Amount by Year (Mn)

10,000

Total Gross Loss 41,501Mn 8,111 8,154

9,110

8,000

Figure 2 shows the total gross loss amount reported by year. The chart shows a distinct step up in 2007. When this chart is compared with Figure 1, it is clearer that the trend is not just due to the increasing numbers of ORX Members. Due to litigation that is allegedly in progress, it may take more than a year for the final picture of losses in 2007 - 2009 to become clear.

6,000

5,531

5,178

5,417

4,000

2,000

2004i

2005i

2006i

2007i

2008i

2009i

Figure 3: Gross Loss / 100 Gross Income per Year ()

2.00

1.73
1.50

Average of 1.44 per 100 Gross Income 1.56 1.34 1.14 1.62 1.36

Figure 3 shows the gross loss amount divided by the gross income. A way of interpreting this chart is that operational risk losses, on average, account for 1.44% of gross income. The result for 2004 must reflect a low gross income year, Figures 1 and 2 do not show it as being a year of large losses. Of interest is that the 2008 spike does not seem to have carried through to 2009. It can be seen in Figure 6 that effects carry through to 2009Qu1 but no further.

1.00

.50

2004i

2005i

2006i

2007i

2008i

2009i

Operational Riskdata eXchange (ORX) 2010

Overall Summary of ORX Data

Table 2 Overall Summary of ORX Data past 12 quarters
2007 Qu1 Total Number of Loss Events 5,963 2007 Qu2 5,613 2007 Qu3 5,491 2007 Qu4 6,886 2008 Qu1 8,092 2008 Qu2 7,706 2008 Qu3 8,034 2008 Qu4 10,996 2009 Qu1 7,495 2009 Qu2 7,016 2009 Qu3 5,915 2009 Qu4 6,627

Total Gross Loss (Mn)

1,309

1,586

1,690

3,527

1,411

1,424

1,702

3,617

3,307

2,056

1,625

2,121

Average Loss per Event ()

219,520 282,558 307,776 512,199

174,370 184,791 211,850 328,938

441,227 293,044 274,725 320,054

Table 2 has the same structure as Table 1, but from a quarterly perspective rather than annual. There does seem to be a trend of Qu4 generally being the worst in the year for gross loss amount, but 2009Qu1 provides an exception. indicating that perhaps 2008Qu4 and 2009Qu1 was the peak of the financial crisis from an operational risk perspective, This information can be seen graphically in Figures 4 and 5 below. These 12 quarters account for 60% of the total number of losses and the total gross loss amount since 1 January 2004. If we include the major Corporate Finance losses of 2002 & 2003 then a different picture emerges. The average gross loss per event is very volatile with the range of 512,199 to 174,370 being 3x the low figure. Interestingly the high and the low are either side of year-end 2007. The average for this period is approximately 300,000 per event, for 2004-2006 the average is 285,000. Apparently not much change between the two sets of data, however, the results of some litigation still has to feed through into the 2007-2009 data.

Operational Riskdata eXchange (ORX) 2010

Overview of ORX data for the last 12 Quarters

Figure 4: Total Number of Events for past 12 Quarters
12,000 10,000 8,000 6,000 4,000 2,000 0 2007Qu1 i 2007Qu3 i 2008Qu1 i 2008Qu3 i 2009Qu1 i 2009Qu3
5,963 5,613 5,491 8,092 6,886 7,706 8,034 7,494 7,016 5,915 Total Number of Events 85,834 10,996

6,627

Figure 4 shows the total number of loss events on a quarterly basis, as reported in Table 2. The number of events for this period represents about 60% of the Total Number of Events since 1 January 2004. The spike in 2008Qu4 is perhaps more obvious in the chart than in the table. The spike is about 37% higher than the prior quarter figures, which is also amongst the highest across these 12 quarters. Also of interest is the relative decline in the number of events in 2009.

Figure 5: Total Gross Loss Amount for past 12 Quarters (Mn)

4,000 3,500 3,000 2,500
2,056 2,121 1,625 Total Gross Loss 25,375Mn 3,527 3,617 3,307

Figure 5 shows the total gross loss amount on a quarterly basis, as reported in Table 2. The volatility is more transparent in the figure than in the Table. For 2007 and 2008 the last quarter accounts for nearly 45% of losses being reported. The picture for 2009 is obscured by the relatively large amount reported in Qu1. The loss amount for 2008Qu4 is dominated by two events over 200Mn while 2009Qu1 has five. This indicates the influence of Low Frequency High Impact events.

2,000 1,500 1,000 500

1,309

1,586

1,690 1,411 1,424

1,702

0 2007Qu1 i 2007Qu3 i 2008Qu1 i 2008Qu3 i 2009Qu1 i 2009Qu3

Figure 6: Gross Loss / 100 Gross Income for past 12 Quarters ()

3.50 3.00 2.50
2.02 Average of 1.39 per 100 Gross Income 2.95 3.13

Figure 6 shows the total gross loss amount per 100 of gross income. The average for this period compares favourably with the Figure 3 period average of 1.44. Some of the spikes may reflect the booking of operational risk losses as opposed to particularly low gross incomes. By comparison, the strong gross income in 2009 helped to generate ratios at the lower end of the range. Some of the volatility, in comparison to Figure 3, is due to displaying the results on a quarterly, as opposed to annual, basis.

2.00 1.50 1.00 0.50 0 2007Qu1 i 2007Qu3 i 2008Qu1 i 2008Qu3 i 2009Qu1 i 2009Qu3
Operational Riskdata eXchange (ORX) 2010 0.92 1.40 1.15 1.13 1.15 1.21 1.01 1.19 1.28

ORX data by Size of Gross Loss

Figure 7: Distribution of Number of Events by Size
80.0% 2004-2008 70.0% 80.0% 60.0% 70.0% 50.0% 60.0% 40.0% 50.0% 30.0% 40.0% 20.0% 30.0% 10.0% 20.0% 0.0% 20k-<100k 10.0% 100k-<500k 500k-<1000k 1000-<5000k 5000k-<10000k 10000k+

2009QU1-4 2004-2008

Figure 7 shows the number of loss event segmented by size of loss. The size segments have been selected by feel as opposed to statistical significance. Given the degree of granularity in the size segments there does not appear to be any significant difference between 2009 and the data for 2004-2008. The reduction in the 20k - <100k shows as an increase in the 100k - <500k segment, indicating a small increase in the size of relatively high frequency low impact losses.

2009QU1-4

0.0%

Figure 8: Distribution of Total Gross Loss by Size

2004-2008 70.0% 80.0% 60.0% 70.0% 50.0% 60.0% 40.0% 50.0% 30.0% 40.0% 20.0% 30.0% 10.0% 20.0% 0.0% 20k-<100k 10.0% 100k-<500k 500k-<1000k 1000-<5000k 5000k-<10000k 10000k+ 2009QU1-4 2009QU1-4 2004-2008

80.0%

20k-<100k

100k-<500k

500k-<1000k

1000-<5000k

5000k-<10000k

10000k+

Figure 8 shows the total gross loss for each of the size loss segments. With the reference data set being composed of events recognised in 2004-2008 the large losses from Corporate Finance in 2002 and 2003 do not show. The chart shows an increase in the total values of losses in the largest loss segment. When interpreted with Figure 7 the implication is that the average size of these large losses is increasing. This segment accounts for 55% of 2009 losses, but only 48% of 2004-2008. The other segments all show a reduction in 2009 data in comparison with 2004-2008. The biggest changes are in the 20k - <100k 9% vs. 11% and 1,000k - <5,000k 13% vs. 15%. Results from current litigation will be reported to ORX in the future and may affect the 2004-2008 benchmark data as much as, or more than, the 2009 results.

0.0% 20k-<100k 100k-<500k 500k-<1000k 1000-<5000k 5000k-<10000k 10000k+

Operational Riskdata eXchange (ORX) 2010

Regional Perspective
Figure 9: Distribution of Number of Loss Events by Region 2004-2008 & 2009Q1-4
2004-2008
Other 9%

2004-2008 North America

Western Europe 43% North America 48%

% 55,445 49,498 10,297 115,240 48.1% 43.0% 8.9%

Western Europe Others Total

2009Q1-4
Other 19%

2009Q1-4 North America Western Europe

Western Europe 45% North America 36%

% 9,840 12,139 5,074 27,053 36.4% 44.9% 18.8%

Others Total

Figure 9 shows the distribution of the number of events across the regions. Members report country codes linked to each individual event. These country codes are then mapped to regions for reporting back to ORX Members. This supports anonymity. The region Other is composed of Africa, Central and South America and the Caribbean, Eastern Europe and the Middle East. The geographic distribution of events mirrors the locations where Members are conducting business, not just where their headquarters are located. When comparing 2009 with the benchmark 2004-2008 data the reduction in the size of North America and the increase in size of Others is apparent. An influential factor may be that a number of new ORX Members have significant business in Others region.

Operational Riskdata eXchange (ORX) 2010

Regional Perspective
Figure 10: Distribution of Gross Loss Events by Region 2004-2008 & 2009Q1-4
2004-2008
Other 8%

2004-2008 North America

Western Europe 43% North America 49%

Mn 16,009 13,859 2,523 32,391

% 49.4% 42.8% 7.8%

Western Europe Others Total

2009Q1-4
Other 20%

2009Q1-4 North America

Western Europe 54% North America 26%

Mn 2,321 4,952 1,837 9,110

% 25.5% 54.3% 20.2%

Western Europe Others Total

Figure 10 shows the distribution of the total gross loss across the regions. There are dramatic differences between the benchmark period of 2004-2008 and 2009. In particular is the noticeable reduction in the contribution from North America, down from 49% to 26%. At the same time Others increases from 8% to 20% and Western Europe from 43% to 54%. As mentioned above part of this increase in Others may be the result of the location of business activities of some of the newer Members of ORX. It will be interesting, in the years ahead, to see where the losses arising from pending litigation get posted and their impact on the relative share. Even though this reference data set does not include the Corporate Finance North American losses from 2002 and 2003 the message would be the same.
Operational Riskdata eXchange (ORX) 2010

Heat Map of Event Frequency

Table 3a: Distribution of Frequency of Loss by Business Line by Event Type 2004-2008
Nos of Events Internal Fraud External Fraud Employment Practices & Workplace Safety Clients Products & Business Practices Disasters & Public Safety Technology & Infrastructure Failures Execution, Delivery & Process Management Malicious Damage Total % of Total

Corporate Finance Trading & Sales Retail Banking Commercial Banking Clearing Agency Services Asset Management Retail Brokerage Private Banking Corporate Items Mutliple Lines Total % of Total

14 96 3,843 180 34 30 49 210 124 45 24 4,649

154 773 43,528 4,607 709 310 73 359 408 260 162 51,343

148 558 8,368 336 65 187 183 701 162 1,310 26 12,044 8.46%

275 709 7,797 2,054 86 264 584 2,586 1,637 300 108 16,400 11.53%

17 19 1,052 64 3 17 12 12 20 232 17 1,465 1.03%

11 786 1,258 265 145 120 90 69 80 112 34 2,970 2.09%

406 11,845 19,875 5,358 1,324 5,941 2,716 1,701 2,843 924 269 53,202 37.39%

0 0 204 5 0 0 0 0 1 7 3 220 0.15%

1,025 14,786 85,925 12,869 2,366 6,869 3,707 5,638 5,275 3,190 643 142,293

0.72% 10.39% 60.39% 9.04% 1.66% 4.83% 2.61% 3.96% 3.71% 2.24% 0.45%

3.27% 36.0836.08%

1%-<5%

5%-10%

>10%

Table 3a shows the distribution of the number of loss events across the Business Lines and Event Types and their intersections. The shading acts as a heat map and represents the contribution to the total number of losses. For the 2004-2008 benchmark period the top three Business Lines are Retail Banking, Trading & Sales and Commercial Banking. The top three Event Types are: Execution, Delivery and Process Management, External Fraud, and Clients Products & Business Practices. Although these three Event Types account for 85% of the number of event the degree of concentration is not as great as for the Business Lines.

Operational Riskdata eXchange (ORX) 2010

10

Heat Map of Event Frequency

Table 3b: Distribution of Frequency of Loss by Business Line by Event Type 2009Q1-4
Nos of Events Internal Fraud External Fraud Employment Practices & Workplace Safety Clients Products & Business Practices Disasters & Public Safety Technology & Infrastructure Failures Execution, Delivery & Process Management Malicious Damage Total % of Total

Corporate Finance Trading & Sales Retail Banking Commercial Banking Clearing Agency Services Asset Management Retail Brokerage Private Banking Corporate Items Mutliple Lines Total % of Total

1 11 692 26 5 10 7 42 28 5 4 831

25 142 7,233 810 186 231 7 57 84 36 16 8,827

18 105 2,395 86 7 13 23 96 30 229 7 3,009 11.12%

55 135 1,672 541 10 60 124 546 423 53 16 3,635 13.44%

14 3 203 18 0 1 2 1 1 29 1 273 1.01%

0 114 170 32 23 13 17 12 26 36 5 448 1.66%

56 1,874 3,764 1,147 274 1,158 506 360 668 149 17 9,973 36.86%

0 0 56 0 0 0 0 0 0 1 0 57 0.21%

169 2,384 16,185 2,660 505 1,486 686 1,114 1,260 538 66 27,053

0.62% 8.81% 59.83% 9.83% 1.87% 5.49% 2.54% 4.12% 4.66% 1.99% 0.24%

3.07% 36.032.63%

1%-<5%

5%-10%

>10%

Table 3b shows the distribution of the number of loss events across the Business Lines and Event Types and their intersections. The shading acts as a heat map and represents the contribution to the total number of losses. For 2009 the top three Business Lines are Retail Banking, Commercial Banking and Trading & Sales. These three Business Lines account for 78% of the number of losses, a slight reduction in concentration from the 2004-2008 set (80%). Some of the growth in number of losses can be seen in Agency Services 5.5% vs. 4.8% and Private Banking 4.7% vs. 3.7%. The top three Event Types are still: Execution, Delivery and Process Management, External Fraud, and Clients Products & Business Practices. However in 2009 these three Event Types account for 80% vs. 85%. Amongst the other Event Types Employment Practices & Workplace Safety has seen an increased share in 2009 (11% vs. 8.5%). The overall interpretation seems to be one of stability and consistency with the benchmark period of 2004-2008 with a slight shift from Execution to Client related events.

Operational Riskdata eXchange (ORX) 2010

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Heat Map of Gross Loss Amount

Table 4a: Distribution of Gross of Loss by Business Line by Event Type 2004-2008
Mn
Internal Fraud External Fraud Employment Practices & Workplace Safety Clients Products & Business Practices Disasters & Public Safety Technology & Infrastructure Failures Execution, Delivery & Process Management Malicious Damage Total % of Total

Corporate Finance Trading & Sales Retail Banking Commercial Banking Clearing Agency Services Asset Management Retail Brokerage Private Banking Corporate Items Mutliple Lines Total % of Total

10 1,617 774 283 8 21 185 139 109 69 27 3,241

624 1,083 3,211 1,589 56 32 24 38 253 115 386 7,411

49 195 1,000 54 10 21 89 163 45 238 40 1,905 4.59%

959 1,636 3,503 1,776 311 428 878 651 987 437 2,051 13,618 32.81%

1 6 147 7 1 5 18 1 2 108 6 301 0.73%

6 115 214 158 22 14 10 6 6 13 29 591 1.43%

758 4,726 3,499 2,077 199 1,021 696 210 356 654 219 14,416 34.74%

0 0 16 0 0 0 0 0 0 1 0 17 0.04%

2,407 9,378 12,364 5,943 606 1,543 1,900 1,209 1,758 1,635 2,758 41,501

5.80% 22.60% 29.79% 14.32% 1.46% 3.72% 4.58% 2.91% 4.24% 3.94% 6.65%

7.81% 36.017.86%

1%-<5%

5%-10%

>10%

Table 4a shows the distribution of the total gross loss amount across the Business Lines and Event Types and their intersections. The shading acts as a heat map and represents the contribution to the total gross loss amount. For the 2004-2008 period the top three Business lines are Retail Banking, Trading & Sales and Commercial Banking. These three Business Lines account for 67% of the gross loss amount. The gross loss amount is less concentrated than the number of losses. If the few but large Corporate Finance Losses of 2002 and 2003 are included then Corporate Finance is elevated from fifth position into the top three. Comparison with Table 3a shows that Retail Banking is dominated by relatively High Frequency Low Impact losses. The top three Event Types are: Execution, Delivery and Process Management, External Fraud, and Clients Products & Business Practices. Although these three Event Types account for 85% of the number of event the degree of concentration is greater than for the Business Lines.

Operational Riskdata eXchange (ORX) 2010

12

Heat Map of Gross Loss Amount

Table 4b: Distribution of Gross of Loss by Business Line by Event Type 2009Q1-4
Mn
Internal Fraud External Fraud Employment Practices & Workplace Safety Clients Products & Business Practices Disasters & Public Safety Technology & Infrastructure Failures Execution, Delivery & Process Management Malicious Damage Total % of Total

Corporate Finance Trading & Sales Retail Banking Commercial Banking Clearing Agency Services Asset Management Retail Brokerage Private Banking Corporate Items Mutliple Lines Total % of Total

0 119 99 46 1 14 5 21 28 0 0 334

540 772 672 365 20 9 1 7 185 7 343 2,921

4 39 224 17 1 1 4 18 7 43 14 371 4.07%

369 341 442 142 264 22 117 74 516 37 107 2,430 26.68%

1 1 19 3 0 0 18 0 0 2 0 44 0.48%

0 17 22 114 4 1 2 0 1 4 1 166 1.83%

228 1,115 624 303 32 220 111 32 63 107 5 2,839 31.16%

0 0 0 0 0 0 0 0 0 0 0 5 0.06%

1,141 2,404 2,105 990 323 267 256 152 801 201 470 9,110

12.53% 26.38% 23.11% 10.87% 3.54% 2.93% 2.81% 1.67% 8.79% 2.21% 5.16%

3.67% 36.032.06%

1%-<5%

5%-10%

>10%

Table 4b shows the distribution of the total gross loss amount across the Business Lines and Event Types and their intersections. The shading acts as a heat map and represents the contribution to the total gross loss amount. For 2009 the top three Business Lines are Retail Banking, Trading & Sales and Corporate Finance. These three Business Lines account for 62% of the gross loss amount, a slight reduction in concentration from the 2004-2008 set (67%). Corporate Finance now contributes 12.5% vs. 5.8% for 2004-2008. Following a comparison with Table 3 a & b, it is deduced that this change in ranking is due to Low Frequency High Impact losses, especially due to External Fraud. One of the other changes, in comparison with 2004-2008 is the growth in contribution for Private Banking at 9% up from 4%. The top three Event Types are still: External Fraud Execution, Delivery and Process Management, and Clients Products & Business Practices. However in 2009 these three Event Types account for 90% vs. 85% in 2004-2008. External fraud has seen a dramatic increase to 32% up from 18% in 2004-2008. In contrast Internal fraud has seen a big reduction from 8% to 3.7% in 2009. The dramatic interactions between the Business Lines and Event Types are: External Fraud and Corporate Finance External Fraud and Trading & Sales External Fraud and Retail Banking Clients, Products & Business. Practices and Private Banking Execution, Delivery & Process Management and Trading & Sales Execution, Delivery & Process Management and Retail Banking

These six combinations account for 47% of the total gross loss amount.
Operational Riskdata eXchange (ORX) 2010

13

Business Line Performance

Table 5a: Business Line Risk Ranking 2004-2008
Business Line Average Loss per Event

Business Line

Gross Loss/ 100 Gross Income

Ranking 1 2 3 4 5 6 7 8 9 Trading & Sales Corporate Finance Private Banking Agency Services Asset Management Commercial Banking Retail Brokerage Clearing Retail Banking

Ranking 1 2 3 4 5 6 7 8 9

Corporate Finance Trading & Sales Asset Management Commercial Banking Private Banking Clearing Agency Services Retail Brokerage Retail Banking

2,348,769 634,245 512,597 461,798 333,263 256,162 224,643 214,363 143,892

3.07 1.99 1.94 1.86 1.52 1.25 1.09 1.07 0.99

Table 5b: Business Line Risk Ranking 2009Q1-4

Business Line Average Loss per Event

Business Line

100 Gross Income

Gross Loss/

Ranking
Value Rank

Ranking
Value Rank

Corporate Finance Trading & Sales Clearing Private Banking Asset Management Commercial Banking Agency Services Retail Brokerage Retail Banking

6,752,175 1,008,189 638,918 635,612 373,694 372,330 179,789 136,257 130,071

1 2 3 4 5 6 7 8 9

Private Banking Corporate Finance Trading & Sales Clearing Agency Services Asset Management Retail Brokerage Retail Banking Commercial Banking

4.12 3.59 2.34 2.13 1.37 1.25 0.78 0.70 0.70

1 2 3 4 5 6 7 8 9

Tables 5 a and b show two risk rankings for the Business Lines. Corporate Centre and Multiple Lines of Business have been excluded as they do not have Gross Income. For the Average Loss per Event not every business line shows an increase in 2009 over 2004-2008. Business Lines at the top tend to be dominated by Low Frequency High Impact Losses (e.g. Corporate Finance) and those at the bottom are dominated by High Frequency Low Impact Losses (e.g. Retail Banking). Comparing 2009 with the benchmark, 2004-2008, there are some dramatic changes. For example the average loss size for Corporate Finance in 2009 is almost 3x 2004-2008. Clearing shows an increase of a similar size. Meanwhile Trading & Sales and Private Banking are closer to 2x. Retail Brokerage has seen a 35% reduction while Commercial Banking and Agency Services both have reductions of about 20%. For the Gross Loss per 100 Gross Income, this ratio is as much about changes in Gross Income as it is about the changes in patterns of losses. A low ratio indicates that operational risk losses have had a lower impact on Gross Income. When considering that expected losses should be met from the income stream then this metric shows some interesting results. For example Private Banking and Corporate Finance are 2x less robust in 2009 than 2004-2008. In comparison Commercial Banking has significantly improved its position and is nearly 2x more robust. Trading & Sales, although still in the top three for the worst ratio is more robust in 2009 than 2004-2008.
Operational Riskdata eXchange (ORX) 2010

14

Performance in the Financial Crisis

Figure 11a: All Business Lines
The next few figures indicate how the financial crisis has affected the operational risk environment for Members of ORX. The charts are based on quarterly data from 2006 on the assumption that the crisis began to make itself felt in 2007.

Gross Income (Mn)

250,000

200,000

150000

100,000 0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

12,000 Gross Loss (Mn)

4,000

10,000 3,500
3,000 8,000 2,500 2,000 6,000 1,500 1,000 4,000 500 2,000 0

2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 Number of Losses 12,000 10,000 8,000 6,000 4,000 2,000 0

2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Figure 11a shows a stack chart across All Business Lines and Event Types on a quarterly basis. The components are Gross Income, Gross Loss amount and the Number of Losses. The material is presented as a chart rather than a series of ratios due to some of the difficulties in interpreting some of the ratios and whether change is due to the numerator or denominator. For Gross Income the dip in 2008 and recovery in 2009 become evident. The dramatic increases in total Gross Loss at the end of 2007 and 2008, and beginning of 2009 replicate the Figure 5. The spike in the Number of Losses in 2008Qu4 was also shown in Figure 4. The rest of the charts in this series drilldown into the Level 2 Business Lines so that their relative contributions can be seen.
Operational Riskdata eXchange (ORX) 2010

15

Performance in the Financial Crisis

Figure 11b: Wholesale and Non-Wholesale Banking
Gross Income (Mn)
120,000 100,000 80,000 60,000 40,000 20,000 0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Gross Loss (Mn)

2,500 2,000 1,500 1,000 500 0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Number of Losses
10,000 8,000 6,000 4,000 2,000 0 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Wholesale

Non-Wholesale

Figure 11b has plots for Wholesale and Non-Wholesale Banking. For this exercise Wholesale Banking is assumed to be composed of Corporate Finance, Trading & Sales and Commercial Banking. For this exercise Non-Wholesale Banking is composed of: Retail Banking Private Banking Asset Management Clearing Agency Services and Retail Brokerage This split between Wholesale and Non-Wholesale shows that the volatility in the Gross Income and Gross Loss Amount seems to come from the Wholesale Bank. Both parts of the Bank suffer in increases in Gross Loss in 2007Qu4, 2008 and 2009Qu1, but it is more dramatic for the Wholesale Bank. In comparison it is the Non-Wholesale Bank that shows an increase in the number of losses, beginning in 2008.

Operational Riskdata eXchange (ORX) 2010

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