Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies

Journal of Banking & Finance, forthcoming

71 Pages Posted: 31 Jul 2018 Last revised: 12 Jul 2022

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Filippo Curti

Federal Reserve Bank of Richmond - Quantitative Supervision & Research

Atanas Mihov

University of Kansas

John Sedunov

Villanova University - Department of Finance

Date Written: November 22, 2021

Abstract

While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk threatens financial stability. Using supervisory data on large U.S. Bank Holding Companies (BHCs), we find operational losses increase systemic risk through a direct channel that impairs market values of loss-experiencing BHCs as well as a channel of correlated losses that impact multiple institutions simultaneously. Findings are driven by tail events, more pronounced for systemically important and closer-to-distress BHCs, and vary by business lines, event types, and financial/economic environments. Our results extend the operational and systemic risk literatures and have key policy implications.

Keywords: Banking, Operational Risk, Systemic Risk

JEL Classification: G15, G18, G19, G21, G32

Suggested Citation

Berger, Allen N. and Curti, Filippo and Mihov, Atanas and Sedunov, John, Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies (November 22, 2021). Journal of Banking & Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3210808 or http://dx.doi.org/10.2139/ssrn.3210808

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Filippo Curti (Contact Author)

Federal Reserve Bank of Richmond - Quantitative Supervision & Research ( email )

530 E Trade St
Charlotte, NC 28202
United States

Atanas Mihov

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

John Sedunov

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

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