The Impact of Workload on Operational Risk: Evidence from a Commercial Bank

Abstract

Operational risk has been among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulations. To inform better labor decisions, this paper studies how workload affects banks’ operational risk event occurrence. To achieve this goal, we use a unique data set from a commercial bank in China that contains 1,441 operational risk events over 16 months. We find that workload has a U-shaped impact on operational risk error rate. More specifically, the error rate of operational risk events decreases first, as workload increases, and then increases. Furthermore, when workload is low, employees tend to make performance-seeking risks; however, when workload is high, employees tend to exhibit quality degradation due to cognitive multitasking. Based on the causal relationship between workload and operational risk events from the empirical analysis, we discuss staffing policies among branches aimed at reducing operational risk losses. We find that employing a flexible staffing rule can significantly reduce the number of operational risk events by more than 3% under different scenarios. In addition, this significant performance improvement can be achieved by
adding even a little bit of flexibility to the process by allowing employees to either switch their business lines in the same branch or switch branches within the same business lines on a quarterly basis.

Keywords: operational risk, workload, performance-seeking risks, quality degradation, optimal staffing