On the wicked problem of quantifying and managing non-financial risks and the role of digital technology in providing solutions

Abstract

The management of operational risk in financial institutions has all the characteristics of a ‘wicked problem’. Certainly, the repeated efforts of the Bank of International Settlements, (BIS) Basel Committee on Banking Supervision (BCBS) to have banks control and mitigate their operational risks speak to the tractability of extant approaches to addressing them effectively. The original ‘Principles for the Sound Management of Operational Risk’1 and its recent revisions,2 the BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’3 and the ‘Principles for Operational Resilience’,4 collectively offer a sound foundation for addressing this enduring problem. Why then are solutions so elusive for banks to implement? This paper first outlines the institutional and social web of conditions and factors that contribute to the existence of this ‘wicked problem’. It then identifies how AI-based digital technologies can once and for all effectively address the problem of operational risk in large banks. Nevertheless, as powerful as today's digital technologies are, they require an organising vision, particularly if they are to contribute to the management of operational risk. This paper informs such a vision and identifies a comprehensive artificial intelligence-based digital architecture to realise it.