Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies
101 Pages Posted: 27 Feb 2016 Last revised: 19 Dec 2018
Date Written: December 18, 2018
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 banks' nonbanking activities as a natural experiment, we show that U.S. banks' operational risk increased significantly with their business complexity. This pattern is stronger for banks that had been constrained by regulations, especially for those with a Section 20 subsidiary, compared to other banks and also to nonbank financial institutions that were never subject to these regulations. We provide evidence that this pattern results from managerial failure rather than 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: Suggested Citation