As digitalization and people-related risks impact the global banking industry, volatility is on the rise. Growth in competitive digital banking, changes to employee work patterns, economic pressures and continued supply chain issues all threaten the bottom line of financial institutions (FIs). 

These factors are leading to increased risks such as fraud, cyber attacks (from malicious actors externally and internally), mis-selling, potential litigation and reputational damage. Such risks embody the closely intertwined relationship between people and processes. 

Evolving Risk Management Frameworks 

Over the last 15 years, operational risk management frameworks have largely been driven by the rules laid down by the Basel Committee. These required globally active banks to use a combination of internal loss collection, external data and scenario analysis to measure and manage operational risk. While these practices have value, there is a growing realization of the interconnected nature of risk. 

FI leaders need oversight that enables them to better understand the link between people and operational risks. Reviewing risk management practices will provide opportunities to identify and incorporate these emerging human capital risks. In today’s world, frameworks must be connected so that firms can proactively identify risk at the source rather than reporting post-event.

Improving the Linkage Between Human Capital and Operational Risk

Human capital is an increasingly important component of operational risk. However, with increases in data quality and technology, global FIs are now able to pinpoint human capital and behaviors that are at the root of many new or uninsurable risks.

There is also evidence of global banking regulators requiring firms to focus on the human capital aspects of their business. Recent examples include the Digital Operational Resilience Act, which creates a framework to boost the IT security of the financial sector, as well as public speeches by regulators. Frank Elderson, European Central Bank Executive Board Member and Vice-Chair of the Supervisory Board, notes, “A bank can have all the risk controls in place, avail itself of the most advanced tools to manage risks and rely on data of the highest quality, but still become mired in a scandal it has brought upon itself, which badly affects its reputation owing to weaknesses in its internal culture.”1

An assessment of workforce and human capital data should be considered an important element of any operational risk review and process improvement exercise.

“We are seeing a shift in our clients’ needs and abilities. Given that people-related operational risks are more likely to profoundly impact an organization’s very existence, it’s important to consider financial and human capital risks holistically. Although this has been historically harder to measure, we now have the data and tools to help predict these events.”
Mark Miles, Partner, Human Capital Solutions, Aon