December 2009
Introduction:
This is the third 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 from 1 January 2001 up to 30 June 2009.
The first report was published in May 2007 when ORX had 36 members from 13 countries and the Global ORX
Operational Risk Loss Database contained 63,554 loss events with a total value of approximately €21 billion.
This third Report, published in November 2009, represents losses from 52 Members headquartered in
18 countries. The Global Operational Risk Loss Database now contains 142,041 events, with a total gross
loss value of approximately €47 Billion. From the end of 2008, the period covered in the last report, this
represents an increase of nearly 13,000 losses with total gross loss value of approximately €4 Billion.
The report contains some charts relating to losses, on a quarterly basis, since the beginning of 2006. This
material begins with Figure 11. The aim is to show the effects of the financial crisis on operational risk. It is
quite possible 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 remains 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. In addition to publishing this Report, ORX has published substantive research on
operational risk measurement. ORX has decided to extend the range of information captured for Large
Loss Events, this will begin to appear during 2010.
Although this Report is based on the ORX Global Operational Risk Loss Database, the association is
supporting various national databases (Spain and Canada) and work is progressing on establishing a
sector database for Investment Banking. In the next 12 months it is expected that data deliveries will
begin to the Investment Banking database and that specialised databases for global custody, insurance,
fraud, and some country oriented databases will also be established.
To learn more about ORX please visit our web site at 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 publicly in whole or in part.
This permission is granted provided that, if any aspect of this document is incorporated into a public document, into materials given to clients
by consultants or into commercial products such as software, its ownership by ORX is acknowledged appropriately.
ORX has prepared this document with care and attention. ORX does not accept responsibility for any errors 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.
2
Overview of ORX Data
Table 1 Overall Summary of ORX Annual Data (2002 - 2009)
Total Number of
Loss Events 142,041 8,519 11,338 14,920 18,106 21,620 23,117 31,511 12,910
Numbers of
ORX Members 12 12 17 22 34 41 52 52
Table 1 provides an overall summary of the loss data reported to ORX using an annual perspective. Table 2 has
similar data, but on a quarterly basis from the beginning of 2007.
As of 31 June 2009 the ORX Global Operational Risk Database contained 142,041 indiviudal loss events, where each
event is equal to, or in excess of, €20,000 value. In terms of total gross loss amount the sum is €46,761 Mllion.
For the period covered the average loss amount, is €329,208 per event. This is an increase from the average amount
for the period ending 31 December 2008, €320,854. For both data sets the peaks, in terms of average loss amounts,
are in 2002 & 2003 and influenced by some large individual losses in the Corporate Finance business line.
As mentioned in the Introduction, there are a number of new Members contributing to ORX. However, at the same
time a number of Members are completing their mergers and integration, for example Commerzbank and Dresdner
Bank. As a result, the statistics for the number of Members reporting for each quarter has limited explanatory power
to the trends in the data.
When considering trends in data the impact of FX rates should not be forgotten. The figures in the ORX database
are all denominated in €, whereas a significant proportion of losses are denominated in US$. This affects not only US
Banks, but also non-US Banks with activities in the US and conducting business in US$ outside the US. Over this period
the FX rates have fluctated in excess of 10%.
3
Visual Overview of ORX Data
Figure 1: Total Number of Loss Events by Year
35,000 Figure 1 shows the total number of events reported
Total Number of Loss Events by year. The chart records the steady increase in
30,000 142,041 the number of events. There are a number of biases
25,000 towards the increase, for example the number of
Members reporting data, especially after adjusting for
20,000 mergers between ORX Members.
15,000 There is a jump in the data from 2007 to 2008. While
some of this may be due to new Members, part may be
10,000
due to the effects of the finanical crisis on banks and the
5,000 risk environment in which they are operating. At the half-
way stage, it looks as though 2009 will be between 2007
0
2002 2003 2004 2005 2006 2007 2008 2009H1 and 2008, possibly closer to the 2008 total than 2007.
1.5 If we exclude 2002 and 2003, with their few large losses in
Corporate Finance, then the change in direction in 2007
1.0 is emphasised. Adding to the increase in loss amount in
2008 were the depressed gross income figures for some
0.5
sections of the banking sector. It will be interesting to
0.0 get the picture for the whole of 2009 with the recent
2002 2003 2004 2005 2006 2007 2008 2009H1
announcements of some strong financial performances.
4
Table 2: Overview of ORX data for the last 10 Quarters
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Total Number of
Loss Events 5,800 5,434 5,284 6,599 6,938 6,773 7,455 10,345 6,950 5,960
Table 2 has the same structure as Table 1, but provides a quarterly, rather than annual perspective. Even with the
limited length of data series, the peaks in year-end are noticeable for the number of losses and the total gross loss
amounts. These are shown visually in Figures 4 and 5 below.
These 10 quarters account for almost 50% of all the events reported to ORX and 40% of the total gross loss.
The gross loss percentile would be higher if we removed the large Corporate Finance events in 2002 & 2003 from
the baseline.
The average loss per event is very volatile with a minimum of €143,269 and a maximum of €438,417, only 12
months apart. The overall average for this period is a loss of €267,290 per event which compares with €329,208 for
the total 2002-2009 period, as reported in Table 1 and an average of €286,204 for the pre-financial crisis period of
2004-2006 inclusive.
5
Overview of ORX data for the last 10 Quarters
Figure 4: Total Number Loss Events for past 10 Quarters
Figure 4 shows the total number of loss events as on
12,000
Total Number of Loss Events 67,538 a quartetrly basis, as reported in Table 2. These 10
10,000
quarters, when combined account for about 50% of
all losses reported to ORX.
8,000
The results for 2008Q4 are “head and shoulders“
above the rest at 10,345 events. Even allowing for a
6,000
year-end effect, the increase in 2008Q04 vs 2008Q3
4,000
is substantial. Also of interest is the steep decline in
the number of events in 2009. It is too early to say if
2,000 this is a trend and we will have to wait for the full year
figures to see if the 2009Q4 year-end effect offsets
0 the reduction in 2009Q2.
2007Q1 2007Q3 2008Q1 2008Q3 2009Q1
0
2007Q1 2007Q3 2008Q1 2008Q3 2009Q1
Figure 6: Gross Loss / €100 Gross Income for past 10 Quarters (€)
3.5
Average of €1.46 Gross Loss Figure 6 shows the total gross loss amount per €100
per €100 Gross Income of Gross Income , as for Figure 3. Again 2008Q4
3.0 stands out with losses of €3.48 / €100 Gross Income.
2.5
Contributing to this figure will be the changes in Gross
Income reported to ORX. Likewise 2009Q1 and
2.0 2009Q2 may look good, but when compared with
Figure 5 it is apparent that the strong Gross Income
1.5
reported by Members is a contributing factor to the
1.0 €1.88 and €0.78 per €100 Gross Income respectively.
0.5
0.0
2007Q1 2007Q3 2008Q1 2008Q3 2009Q1
6
ORX data by Size of Gross Loss
Figure 7: Distribution of Number of Loss Events by Size
80.0% Figure 7 shows the number of loss events by size of
2002 - 2008
loss. The size “buckets” have been selected by “feel”
70.0%
2009H1 as opposed to statistical significance.
60.0%
Given the possible level of granualrity in the scales,
there doesn’t appear to be any significant difference
50.0%
in the distribution of loss sizes in 2009 in comparison
40.0% to history. Possibly the loss sizes amongst the higher
frequency events has increased marginally accounting
30.0% for the small changes in the €20k < €100k
vs. €100k < €500k “buckets”.
20.0%
10.0%
0.0%
€20k-<€100k €100k-<500k €500k-<1000k €1000k-<€5000k €5000k-<€10000k €10000k +
7
Regional Perspective
Figure 9: Distribution of Number of Loss Events by Region
Figure 9 shows the distribution of the
number of events across the regions.
Others: 8% North Members report country codes associated
America 50% with each individual event, these are then
mapped to regions for reporting back to the
Western Members. This supports anonymity.
Europe 42% The region “Other” is composed of
Africa, Central and South America and the
Caribbean, Eastern Europe and the Middle
2002-2008 East. The geographic distribution of events
mirrors the locations where Members
are doing business, not just where their
headquarters are domiciled.
North What is noticeable about the distribution
Others: 17% America 39% of loss events in 2009H1, in comparison
to 2002-2008, is the reduction in the
proportion of events related to North
Western America and the increase in “Others”.
Europe 44% Due to anonymity of the data set it is not
possible to tell if this is due to the locations
of new ORX Members.
2009H1
8
Heat Map of Event Frequency
Table 3a: Distribution of Number of Losses by Business Line
by Event Type (2002-2008)
Trading & Sales 111 788 495 674 26 705 11,510 0 14,309 111.08%
Retail Banking 4,042 40,603 7,283 7,525 867 1,120 17,646 111 79,197 61.33%
Commercial Banking 178 3,861 331 1,818 55 237 4,291 2 10,773 8.34%
Total 4,911 47,398 11,167 15,419 1,282 2,615 46,212 127 129,131
Table 3a shows the distribution of the number of loss events across the Business Lines and Event Types and their
intersections. The shading represents the contribution to the total number of losses.
For the 2002-2008 period the top three Business Lines are Retail Banking, Trading & Sales and Commercial Banking,
in that order. The top three Event Types are External Fraud; Execution, Delivery & Process Management; and Clients,
Products & Business Practices. What is interesting is that the top two Event Types make such a big contribution to the
total. Drilling into the table, Retail Banking is the Business Line contributing to these Event Types, in particular External
Fraud.
9
Heat Map of Event Frequency
Table 3b: Distribution of Number of Losses by Business Line
by Event Type (2009H1)
Table 3b shows the distribution of the number of loss events across the Business Lines and Event Types and their
intersections for 2009H1. The shading represents the contribution to the total number of losses.
There is consistency, with 2002-2008, over the top three Business Lines and their ranking, Retail Banking, Trading &
Sales and Commercial Banking. There is little change, between the two data set, in the contribution of these Business
Lines to the total.
The top three Event Types, for 2009H1, are External Fraud; Execution, Delivery & Process Management; and Clients,
Products & Business Practices. Employment Practices and Workplace Safety has seen an increase from 8.65% (2002-
2008) to 10.13% (2009H1). What is interesting is that the top two Event Types make such a big contribution to the total
and that this applies whether considering 2002-2008 or 2009H1.
10
Heat Map of Total Gross Loss
Table 4a: Distribution of Gross Loss Amount by Business Line
by Event Type (2002-2008)
Trading & Sales 1,462 353 161 1,773 5 109 3.838 0 7,701 18.17%
Retail Banking 780 3,091 849 3,097 125 190 3,008 8 11,149 26.31%
Table 4 shows the distribution of the total gross loss amount across the Business Lines and Event Types and their
intersections. The shading represents the contribution to the total gross loss amount.
The top three Business Lines are Retail Banking, Trading & Sales, and Corporate Finance, in that order. If we exclude
Corporate Finance for the two largest events, occurring in 2002-2003, then it drops out of the top three and is replaced
by Commercial Banking .
The top three Event Types are Clients, Products & Business Practices; Execution Delivery & Process Management and
External Fraud in that order. Even if we exclude the two largest Corporate Finance events, then Clients, Products &
Business Practices is still the most significant event type.
11
Heat Map of Total Gross Loss
Table 4b: Distribution of Gross Loss Amount by Business Line
by Event Type (2009H1)
Table 4b shows the distribution of the total gross loss amount across the Business Lines and Event Types and their
intersections for 2009H1. The shading represents the contribution to the total gross loss amount.
For both historical periods the top three Business Lines are Trading & Sales, Retail Banking and Corporate Finance, in
that order different from the 2002-2008 period in Table 4a. A comparison between the two sets of data shows the
increased contribution made by Trading & Sales (19.5% vs. 25%) and the relative reduction from Retail Banking (28.3%
vs. 20.9%). For Trading & Sales the Event Type that has gained in relative importance is Execution, Delivery & Process
Management. External Fraud has also increased in prominence, for Trading & Sales, climbing from 5% to 36.8%,
experiencing the same level of losses 2009H1 as in the entire 2002-2008 period. Taking into account the number of
losses in Table 3, the average loss per event has grown from €448,000 (2202-2008) to €2,816,000 (2009H1)!
The top three Event Types are External Fraud; Clients, Products & Business Practices; and Execution Delivery & Process
Management. The most significant change is increase in the relative importance of External Fraud (14.3% for 2202-
2008 vs. 36.8% for 2009H1), some of this is attributable to External Fraud in Trading & Sales, but also in Corporate
Finance, Commercial Banking and Private Banking . Perhaps surprisingly, the proportion of External Fraud in Retail
Banking is almost unchanged across the two periods.
Other significant changes include the increased impact of Clients Products & Business Practices upon the Clearing and
Private Banking Business Lines. In terms of decreases the contribution of Execution, Delivery & Process Management is
reduced for Retail Banking.
12
Business Line Performance
Table 5a: Business Line Ranking 2002-2008
Business Line Average Loss per Event Business Line Gross Loss/
€100 Gross Income
€ Ranking € Ranking
Table 5 shows two risk rankings for the Business Lines. This excludes the Corporate Centre and Multiple Lines
of Business, which don’t have a Gross Income of their own.
For the Average Loss per Event an interesting observation is the increase (2002-2008 vs. 2009H1) in the average size of
the losses for half of the Business Lines. The exceptions are Corporate Finance, Commercial Banking, Agency Services,
Retail Brokerage, and Retail Banking. The increase in Clearing is 545%, Private Banking is 270%, and Trading & Sales
is 41%.
For the 2002-2008 ranking, we know from previous discussion, the position of Corporate Finance would be
greatly altered if we adjusted for the two largest losses reported to ORX. This makes the position of Corporate
Finance at the top of the 2009H1 Average Loss per Event the more interesting.
For the Average Gross Loss per €100 Gross Income there are big differences in the ranking. As mentioned
earlier a contributing factor will be the change in Gross Income streams experienced by individual business lines
over 2009. If we look at the fifth ranked Business Line, Asset Management, then the Gross Loss per €100 Gross
Income has gone from €1.26 to €1.41. It is only when we get to the sixth rank that the figures are lower.
© Operational Riskdata eXchange (ORX) 2009
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Performance in the Financial Crisis
14
6,000
Performance in the Financial Crisis ADVISORY SERVICES
5,000
Figure 11b: Corporate Finance MUNICIPAL/GOVERNMENT FINANCE
4,000
6,000 Stack Chart of Gross Income, Gross Loss & Number of Losses
CORPORATE FINANCE
ADVISORY SERVICES
3,000
5,000
2,000
6,000
MUNICIPAL/GOVERNMENT FINANCE
1,000
5,000
CORPORATE FINANCE ADVISORY SERVICES
3,000 MUNICIPAL/GOVERNMENT FINANCE
0
4,000
2,000 TMUNICIPAL/GOVERNMENT
reasury
CORPORATE FINANCE FINANCE
-1,000
3,000
1,000
2,000 Global Markets
0 CORPORATE FINANCE
1,000
-1,000
600
0 ADVISORY SERVICES
500
300 This chart also demonstrates the high level of
MUNICIPAL/GOVERNMENTFINANCE
100
volatility in Gross Losses reported for Corporate
400 Finance (Level 2), the spikes representing €348
CORPORATE FINANCE
200
0 Million and €508 Million. In comparison the other
300 Level 2 Business Lines look stable, but the volatility
100 is reduced by the scale of the chart necessitated by
200 Corporate Finance.
0
In comparison to the following charts, the number
100
50 of losses for the Corporate Finance (Level 1)
Figure 11b: Number of Losses
Business Line is low. When we compare the
ADVISORY SERVICES
50
20 ADVISORY SERVICES
CORPORATE FINANCE
30 CORPORATE FINANCE
40 MUNICIPAL/GOVERNMENTFINANCE
10
20 CORPORATE FINANCE
30
0
10 6Q1 6Q2 6Q3 6Q4 7Q1 7Q2 7Q3 7Q4 8Q1 8Q2 8Q3 8Q4 9Q1 9Q2
00 200 200 200 200 200 200 200 200 200 200 200 200 200
220
0
10 © Operational Riskdata eXchange (ORX) 2009
0 15
Performance in the Financial Crisis
Figure 11c: Trading & Sales
25,000
Stack Chart of Gross Income, Gross Loss & Number of Losses
CORPORATE INVESTMENTS
20,000
25,000
000 25,000 Figure 11 c: Gross Income (€Mn) TREASURYINVESTMENTS
CORPORATE
Corporate
CORPORATE Investments
INVESTMENTS
15,000
CORPORATE INVESTMENTS
20,000
20,000
000 10,000
GLOBAL MARKETS
TREASURY
15,000
TREASURY
Treasury
15,000 EQUITIES
GLOBAL MARKETS
TREASURY
5,000
000 10,000
10,000
GLOBAL MARKETS
GlobalMARKETS
Markets
EQUITIES
5,0000 EQUITIES
GLOBAL
000 5,000
-5,000
0
0 Equities
EQUITIES
-10,000
000 -5,000
-5,000
-10,000
0 -10,000
1,000 Figure 11c shows a stack chart for Trading & Sales
showing the granular Level 2 Business Lines of
Equities, Global Markets, Corporate Investment
000 1,000
800 Figure 11c: Gross Loss (€Mn) and Treasury.
1,000
The impact of the financial crisis on the Gross
000 800
600 Income of Global Markets in 2008Q4 becomes
800 quite evident as does its recovery in 2009. In
comparison the other Level 2 business lines seem
600
400 to evolve more gradually, but some of the volatility
600 may be reduced due to the required scale.
This chart also demonstrates the high level of
1,000 400
200 volatility in Gross Losses reported for Global
400
Markets, and to a lesser extent Equities. Treasury
also has a spike in 2008Q4 although only up to
2000
200 €100 Million it represents a +325% increase on
800 2008Q3. Due to the scale, Corporate Investments
0 is practically on the x-axis. It may take 18 months or
0 more for the results of any current litigation to feed
through into the reports to ORX.
800 Figure 11c: Number of Losses
600 In terms of the Number of Losses, the numbers in
700 2009Q2 have dropped to 2006Q1 levels. When
800 we compare the Number of Losses with the Gross
600 Loss it can be seen that the Global Markets €587
800
400 700
500
Million total gross loss amount is probably due
700 to a few large individual events. However, for
600 2008Q4 there is also an increase in the number of
400
600 events, although for an loss spike of this size there
500
200 300
500
are probably a few individual large loss events as
well.
400
200
400
300
100
0 300
2000
200 1 2 3 4 1 2 3 4 1 2 3 4 1 2
100 6Q 06Q 06Q 06Q 07Q 07Q 07Q 07Q 08Q 08Q 08Q 08Q 09Q 09Q
0
100 20 20 20 20 20 20 20 20 20 20 20 20 20 20
0
0
© Operational Riskdata eXchange (ORX) 2009
800
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700
Performance in the Financial Crisis
35,000
30,000
Figure 11d: Commercial Banking
Stack Chart of Gross Income, Gross Loss & Number of Losses
35,000
25,000
30,000
35,000 Figure 11d: Gross Income (€Mn) Figure 11d shows a stack chart for Commercial
20,000
Banking, there are no Level 2 Business Lines.
25,000
30,000 In comparison with Corporate Finance and
15,000
Trading & Sales there seems to be very little
20,000
25,000 adverse effect on Gross Income of the financial
10,000
crisis. The trend is positive.
15,000
20,000
5,000 As with the other Level 1 Business Lines there
is volatility in the Gross Loss amounts. The
10,000
15,000 spikes appear in 2007Q4 and 2008Q4. There is
0
insufficient information to say whether this is a
5,000
10,000 “year-end” effect or coincidence.
0
5,000 In terms of the Number of Losses, the trend
800 appears to be upwards, results for the rest of 2009
mayGROSS
confirm.
LOSS
The spikes in Gross Loss amounts
700 0 correspond to increases in the number of losses.
Nevertheless the average gross loss per event is
800
600 Figure 11d: Gross Loss (€Mn) approximately
GROSS LOSS
200% higher than the Q3 figures
700 indicating a few individual large losses.
500
800
GROSS LOSS
600
400
700 In the next edition there will be a closer look at
500
300 the performance of the non-wholsale banking
600
activities from the beginning of 2006.
400
200
500
300
100
400
200
0
300
100
200
0
100
1,0000 Figure 11d: Number of Losses
800
1,000
1,000
600
800
800
400
600
600
200
400
400
0
200
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
200 006 006 006 006 007 007 007 007 008 008 008 008 009 009
2 2 2 2 2 2 2 2 2 2 2 2 2 2
0
© Operational Riskdata eXchange (ORX) 2009
0
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