A senior risk leader argued that operational risk is profoundly shaped by economic cycles and often lags market and credit losses, making stress testing uniquely complex. Speaking at Risk Evolve, the executive showed how behavioural shifts, fraud evolutio
In a financial ecosystem increasingly defined by the unpredictable, stress testing operational risk remains one of the least understood but most vital disciplines in risk management.
CeFPro’s 2025 flagship Risk Evolve conference, the managing director of risk at an international bank delivered a rich, thought-provoking session that unpacked why this challenge is so formidable - and what can be done about it.
The MD, with three decades of experience and the penmanship of an accomplished author, began with a photograph of rubbish piling up on the streets - an image taken by his father in the 1970s to symbolize the stagflation of that era.
That visual echo of today’s macroeconomic strain set the tone for his broader argument: that operational risk is deeply cyclical and shaped in profound ways by economic dislocation.
From the financial crisis to the pandemic and today’s energy shocks, the link between macroeconomic conditions and operational failures is not only real but recursively evident.
The meat of the session revolved around how operational risk manifests differently during economic downturns.
What emerged clearly is that operational risk is not purely a function of internal process failures or system glitches. It’s as much about the behavioural responses of clients, counterparties, and staff - and those responses are shaped by broader economic shifts.
The executive pointed to past crises, showing how customer behaviour changed as mortgage lending slowed, how criminal tactics evolved from loan fraud to account takeovers, and how fraudsters adapted their ‘search’ for victims in patterns not dissimilar to how predators forage in the wild.
These aren’t abstract ideas; they’re data-backed observations of how stressors in the economic environment map directly onto new forms of operational loss.
What made the speaker’s argument compelling is not just that he traced these connections historically, but that he went further to show how operational risk often lags behind other forms of risk.
He illustrated this with a wave effect: market losses typically peak first, followed by credit losses, and finally, years later, operational losses crest as latent risks come home to roost.
Taking litigation as an example, the expert explained how those seemingly invisible risks tied to mis-sold products or misleading disclosures often surface long after the original transaction and well after credit and market risks have been priced in.
This time lag - and the sheer diversity of drivers - makes stress testing operational risk incredibly challenging.
For regulators and risk managers alike, one core problem is the absence of consistent, observable correlations between economic metrics and operational losses.
