The Impact of Bank's Internal Governance Mechanism on Operational Loss: Evidence from Turkey

Iranian Economic Review, 2020

20 Pages Posted: 28 Jul 2020

See all articles by Yaman O. Erzurumlu

Yaman O. Erzurumlu

Bahcesehir University

Gurcan Avci

affiliation not provided to SSRN

Date Written: February 1, 2020

Abstract

We study the impact of internal governance mechanisms on the operational risk management provided with deposit banks of Turkey as a Basel compliant representative banking system. Drawing from internal audit, internal control, and risk management literature, we consider the impact of characteristics of these mechanisms on the degree of operational loss at the subcommittee level. Two factors stand out as improving the internal governance of banks. Internal governance quality improves resulting in less material operational loss with adequate staffing. Organization of the internal governance mechanisms, carefully structured control points, and sufficient reporting to senior level management in banks ensure that banks’ shareholders experience fewer surprises. Excess funding has limited or no effect on mitigating operational loss. Characteristics are more significant for internal audit and internal control subcommittees than they are for risk management subcommittee. Results are robust when tests are repeated with aggregated data in order to capture potential cooperation between and contribution of the individual units.

Keywords: Internal Audit; Internal Control; Risk Management; Operational Risk; Operational Loss; Corporate Governance; Internal Governance

JEL Classification: C33, G21; G34; M42

Suggested Citation

Erzurumlu, Yaman O. and Avci, Gurcan, The Impact of Bank's Internal Governance Mechanism on Operational Loss: Evidence from Turkey (February 1, 2020). Iranian Economic Review, 2020, Available at SSRN: https://ssrn.com/abstract=3022517

Yaman O. Erzurumlu (Contact Author)

Bahcesehir University ( email )

Ciragan Avenue Osmanpaşa Mektebi Sokak No: 4 - 6
Besiktas
Istanbul, 34353
Turkey

Gurcan Avci

affiliation not provided to SSRN

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