Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies
90 Pages Posted: 27 Feb 2016 Last revised: 5 Feb 2020
Date Written: January 22, 2020
Recent regulatory proposals tie a financial institution's systemic importance to its complexity. However, little is known about how complexity affects banks' risk management. Using the 1996-1999 deregulations of U.S. banks' nonbanking activities as a natural experiment, we show that banks' business complexity increases their operational risk. This result is driven by banks that had been constrained by regulations, compared with other banks and also with nonbank financial institutions that were never subject to these regulations. We provide evidence that managerial failure underlying these events offsets benefits of strategic risk taking.
Keywords: Operational risk, bank holding companies, financial deregulation, Glass-Steagall Act, business complexity
JEL Classification: G18, G20, G21, G32, L25
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