Journal of Operational Risk

Risk.net

Modeling systemic operational risk in the Covid-19 pandemic

Patrick McConnell

  • The Covid-19 Pandemic was clearly a ‘Systemic Operational Risk Event’, impacting businesses, in particular financial institutions, around the world in the same dramatic ways.
  • However, the Pandemic did not evolve as classical epidemiology models predicted but instead the evolution of the pandemic was significantly affected by government interventions.
  • This paper introduces existing epidemiology models and describes how these models were impacted by various interventions.
  • The paper describes an innovative model, which includes the impacts of interventions, and expands on its implications for the Operational Risk community.

The possibility of a global pandemic occurring suddenly has been known about for many years, and high-level, but vague, remedies and plans have been developed by national governments. However, the sheer ferocity of the novel SARS-CoV-2 virus, which appeared sometime in December 2019 in Wuhan, China, caught many governments and health services by surprise, and, in some cases, temporarily overwhelmed their medical systems. For two years, Covid-19, the disease caused by the virus, has ripped through vulnerable populations across the world, causing illness and death. Because the virus was novel, vulnerable populations had little to no immunity, and until suitable vaccines were developed, other, sometimes draconian, interventions such as border closures and lockdowns were implemented by health authorities and governments. The Covid-19 pandemic is clearly a systemic event, impacting businesses around the world, in particular financial institutions, in the same way. However, what is different are the operational interventions that governments have taken to address the evolution of the pandemic in their countries. So, the pandemic is an example of a systemic operational risk event, where the risks across the financial sector are similar, and interventions, driven by government directions, have a general, rather than local, impact. Some critical questions are raised. How do pandemics evolve? How did the Covid-19 pandemic evolve? How do specific government interventions impact the evolution of a pandemic? This paper addresses some of these questions from the perspective of operational risk management.

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