Operational risk is cyclical and strongly influenced by macroeconomic dislocation

Economic downturns change client counterparty and staff behaviour driving new forms of losses such as shifts in fraud tactics

Operational losses often lag market and credit losses peaking years later especially in litigation cases

Stress testing is difficult due to nonlinear multi causal and behaviour driven links with economic indicators

Regulators differ in guidance but all require firms to design fit for purpose approaches

Grimwade advises triangulating qualitative assessments scenario overlays capital model scenarios and floor models

Goal is proactive intervention tightening controls inspecting clients and testing legal protections

Advocates for reducing dead weight capital and increasing flexible buffers to enhance resilience