In recent years, the financial industry has increasingly shifted its focus toward nonfinancial risks—those that emerge from people, processes, systems, and external events, such as operational risk and regulatory compliance. The price tag of these risks has been steep: losses, fines, and litigation have cost the biggest European and US banks $460 billion since 2010, according to senior partner Thomas Poppensieker and colleagues. Navigating this environment could require institutions to define their risk appetite and limit risk taking in areas that go beyond their risk capacity.
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A bar graph and a line graph both show the annual operational losses, fines, and litigation costs for nonfinancial risks in a sample of European and US banks. The bar graph on the left side of the chart shows the annual total, 2010–23, in billions of dollars. The line graph on the right side of the chart shows the same data cumulatively over the same period. The bar graph shows that losses spiked in 2014 to ~$76 billion, before declining in 2015–19 to ~$33 billion, and then declining further from 2020 to Aug 2023, to ~$16 billion.
Footnote 1: Includes operational risk losses (eg, unauthorized trading), fines, settlements, and expenses for provision buildup (eg, provisions for compensating customers). Based on incidents settled/expensed and gathered through news and press search. Sample of European and US banks totals 304, comprising 830 event/fine/cost entries.
Footnote 2: For 2023, data are from year-to-date Jan–Aug 2023.
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To read the article, see “How a defined risk appetite can improve nonfinancial risk management,” October 25, 2023.