Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk

Chapter ThreeUsing OpRisk Data for Business Analysis

The financial crisis that started in 2008 made the financial industry face challenges it had not seen in decades. The industry was accustomed to high margins and substantial profits (particularly in the years 2000–2007, due to the availability of excess liquidity). However, in the wake of the biggest downturn since the Great Depression, a slow recovery left many firms struggling. Even in 2012/2013, the recovery seemed stalled, as the crisis still lingers to a certain extent, and the high regulatory pressure on financial firms not to take risks is putting a cap on their profits; as a result, most firms across the globe are going through severe cost-cutting programs.

This new economic environment is forcing financial firms to develop a much more careful discipline around costs, risk management, and productivity. Each of these factors has received widespread attention in the media. Productivity is a concept usually associated with manufacturing, but it can also play an important role in asset management.

In this chapter, we argue that, within the options available to them for returning to their former profitability levels, financial firms will have to take a very careful look at their cost structure and risk management frameworks. We analyze the cost structure of financial firms and describe strategic/tactical options to reduce costs on an item-by-item basis. In the last section, we describe how a well-tailored and well-implemented ...