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

See all articles by Anna Chernobai

Anna Chernobai

Syracuse University - M. J. Whitman School of Management

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston

Jianlin Wang

University of California, Berkeley, College of Letters & Science, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2020

Abstract

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

Suggested Citation

Chernobai, Anna and Ozdagli, Ali K. and Wang, Jianlin, Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies (January 22, 2020). Journal of Monetary Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2736509 or http://dx.doi.org/10.2139/ssrn.2736509

Anna Chernobai (Contact Author)

Syracuse University - M. J. Whitman School of Management ( email )

721 University Ave
Syracuse, NY 13244-2450
United States
(315) 443 3357 (Phone)

HOME PAGE: http://https://sites.google.com/a/g.syr.edu/anna-chernobai/

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

HOME PAGE: http://sites.google.com/site/ozdagli/

Jianlin Wang

University of California, Berkeley, College of Letters & Science, Department of Economics ( email )

Berkeley, CA
United States

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