IOR England & Wales Chapter – perspective from IOR/ Operational Risk Dr Jimi Hinchliffe, Chair Covid–19 has had a truly global impact, highlighting the interconnectedness of the modern world. It has caused both supply-side and demand side shocks. The supply side may recover relatively quickly, but demand may take time to recover as big increases in unemployment, businesses failures, and a general loss of consumer and business confidence will supress demand for the foreseeable future. A longer-term consequence of the Covid–19 crisis may be increased fragmentation of the global economy as countries become more inward looking and seek to build increased self-sufficiency. Increased fragmentation may impair the recovery from the economic damage caused by the Covid–19 crisis. The impacts of the Covid–19 crisis on organisations are both direct (e.g. closure of premises, loss of staff capacity, home working etc) and indirect (on customers, suppliers and vendors). With social distancing measures set to remain for some time, firms will have to adjust to a ‘new normal’. Until such time, firms will have to continue operating with a significant proportion of their staff working from home and manage heightened operational risk (including cyber, information security and conduct related risks). When staff do return to the office, they will need to find new ways of working that are consistent with social distancing requirements and may be faced with staff who are reluctant to return to work. There will need to be more collaboration, robust governance and careful management of concentration risks (including in third party suppliers). Maintaining operational continuity of important business services will be critical and firms will need to ensure they have ‘Plan Bs’ in place where the usual methods of delivery are not possible. Operational risk managers broadly considered the impact of a pandemic in modern times and the anticipated extent of the required cross-border and national government response. Many firms did consider pandemic scenarios and as such this is certainly not a Black Swan event as some have suggested. However, it’s clear that many firms considered the likelihood of a pandemic to be remote and did not anticipate the scale of impacts we’ve seen in many countries driven by an extraordinary policy response to Covid–19 e.g. shutting down entire economies and lockdowns. The retail banks also could not have anticipated being required by governments to develop and deliver emergency loans to millions of businesses temporary closed by the Covid–19 response, which exacerbated existing operational challenges of delivering core banking services with reduced staff capacity. However, whilst it would have been difficult to anticipate or predict the nature and scale of the Covid–19 crisis, and the government responses, these ‘radical uncertainties’, as coined by Mervyn Lewis and John Kay describe them in their recent book “Radical Uncertainties”, are inevitable and firms must ensure they are resilient to them. The trend of the last decade to remove redundancy and eliminate spare capacity on grounds of improving efficiency has made organisations more vulnerable and fragile to Covid–19 - like shocks. Boards and senior management, in partnership with Operational Risk functions, have a key role to play in improving operational resilience so that in future organisations can better withstand and absorb similar shocks. As was indicated in the recent IRM survey on the Covid–19 response: https://www.theirm.org/news/irm-survey-risk-management-response-to-the-pandemic/
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