Journal of Operational Risk

Marcelo Cruz

Editor-in-chief

Welcome to the fourth issue of Volume 20 of The Journal of Operational Risk.

My conversations with industry practitioners and academics these days always begin and end on the subject of artificial intelligence (AI). While these are exciting times, the widespread adoption of AI and chatbots in financial institutions has introduced a new set of operational risk challenges that go beyond traditional frameworks. Although these technologies can offer efficiency gains and improved customer experience, they also heighten vulnerabilities in model governance, data integrity and cyber security. In particular, inadequate oversight of AI-driven decision-making can lead to biased outcomes, erroneous advice or noncompliance with regulatory standards. Chatbots, which often rely on large language models (LLMs) and customer data, pose risks relating to data privacy, information leakage and system manipulation through adversarial prompts or phishing tactics. Moreover, the increased dependency on third-party AI vendors amplifies outsourcing and concentration risk, especially when internal teams lack full transparency into the algorithms or data pipelines. From an operational resilience perspective, to mitigate failures, maintain customer trust and comply with evolving regulatory expectations surrounding explainable and ethical AI use, institutions must ensure robust testing, monitoring and human-in-the-loop controls. This merits a discussion that is longer than can be accommodated in this letter to the reader, but I would love to see more research papers devoted to the topic.

In addition, the editorial board would be interested to see submitted papers that discuss the applications of machine learning (ML) techniques – one of the industry’s hot topics. Papers on cyber and IT risks (not just on their quantification but also on better ways to manage them) and on enterprise risk management (ERM) and everything this broad subject encompasses (eg, establishing risk policies and procedures, implementing firm-wide controls, risk aggregation, revamping risk organization, internal audit) would also be very welcome. Analytical papers on operational risk measurement are also keenly sought, particularly those that focus on stress testing and managing operational risk.

The Journal of Operational Risk, as the leading publication in this area, aims to be at the forefront of OpRisk discussions and we welcome papers that shed light on all of the above topics.

RESEARCH PAPERS

In the issue’s first paper, “Key principles for operational risk stress testing design and evaluation”, Eric Cope claims that stress testing frameworks for operational risk often lack clarity with respect to measurement standards and the balance to be struck between systemic (macroeconomic) and idiosyncratic risk factors in test design and evaluation. Cope’s paper surveys different approaches that have been applied in different jurisdictions, and he provides a conceptual framework for designing operational risk stress tests in a manner that enables a measurement standard to be established, allowing banks to evaluate loss projections that meet this standard in order to achieve a full and balanced coverage of a bank’s material operational risks. This is an excellent paper from an author that has been publishing with our journal for many years

The second paper in the issue, “National geopolitical risk perception and corporate innovation” by Lin Zhang and Sinmyong Sok, explores the impact of national geopolitical risk perception on corporate innovation behavior and its underlying mechanisms. The authors construct a national-level geopolitical risk perception index based on Chinese online newspaper data, and they use a sample of Chinese A-share listed companies to conduct an empirical study from the perspectives of innovation quantity, efficiency and quality. Their study finds that geopolitical risk perception significantly promotes the improvement of innovation quantity and efficiency but leads to a decline in innovation quality. A mechanism analysis indicates that geopolitical risk perception affects corporate innovation by intensifying market competition and reducing corporate profitability, while a heterogeneity analysis reveals that firms from different industry types with different levels of marketization and more political connections exhibit significant differences in their innovation response to geopolitical risk. This study provides a new perspective for understanding the relationship between geopolitical risk and corporate innovation and also offers a basis for policy formulation in China.

In “Determining the perception of operational risk management practices based on demographic factors in the South African banking sector”, our third paper, Lancelot Monama, Kago Amiel Matlhaku and Sune Ferreira-Schenk claim that maintaining an adequate degree of operational risk management is a key factor in a bank’s ability to overcome obstacles relating to its finances and reputation. Due to challenges and unpredictability in the operating environment, as well as fluctuating macroeconomic consequences, banks are subject to a variety of operational risks. Those such as people risk and culture risk impact the daily operations of banks and should be closely monitored. This novel study clarifies the important role that demographics play in influencing bank employees’ perceptions of risk. The authors conduct a comprehensive investigation of the perceptions and understandings of various demographic groups about risk management and its implementation in the South African banking industry by surveying the top five commercial banks in the country and then using inferential statistical techniques to explain the survey results. Demographic factors such as age, sex, ethnicity and length of service influence how participants perceive risk differently. However, Monama et al show that a bank’s total operational risk management improves when its staff members understand the risk management procedure.

In the issue’s fourth and final paper, “How has the anti-corruption campaign affected operational efficiency? Evidence from a quasi-natural experiment in China”, Xinrui Zhan and Jingbin He leverage China’s anti-corruption campaign as a quasinatural experiment comparing the periods before and after the introduction of the campaign in 2013 using a Chinese listed firms panel data set. They employ dynamic difference-in-differences estimation to investigate the causal effect of the campaign on firm operational efficiency. Their empirical findings support the notion that the anti-corruption campaign significantly enhanced firm operational efficiency (by around 7%). Zhan and He further examine the moderating effects of political connections, regional market development and corporate social responsibility performance. Their empirical results align with the attention-based view (ABV) framework, indicating that these factors collectively undermine firm operational efficiency by diverting management attention. Their study contributes to the literature by investigating the impact of an improved institutional environment on firm operational performance and by expanding the scope of the ABV. In addition, the study provides essential insights for policymakers, emphasizing the importance of comprehensive anticorruption measures, and it offers decision-makers valuable insights into prioritizing operational activities.