Diseconomies of Scale in Banking: Evidence from Operational Risk

52 Pages Posted: 29 Jul 2018

See all articles by Filippo Curti

Filippo Curti

Federal Reserve Banks - Federal Reserve Bank of Richmond

Atanas Mihov

Federal Reserve Bank of Richmond

Date Written: April 15, 2018

Abstract

This study shows that larger banking organizations are more exposed to operational risk. Specifically, larger banks have higher operational losses per dollar of total assets, a result largely driven by their failure to meet professional obligations to clients, or from the design of their products. Operational risk at larger financial institutions has a counter-cyclical component, where higher losses occur in adverse macroeconomic conditions. Larger banks also experience more volatile losses, (at least partially) driven by a higher incidence of tail operational risk events, and recover less when operational losses occur. Our findings provide new evidence on the association of institutional size and operational risk with potential implications for financial system stability and bank size optimality.

Keywords: banking organizations, size, operational risk, tail risk, recessions

JEL Classification: G20, G21

Suggested Citation

Curti, Filippo and Mihov, Atanas, Diseconomies of Scale in Banking: Evidence from Operational Risk (April 15, 2018). Available at SSRN: https://ssrn.com/abstract=3210206 or http://dx.doi.org/10.2139/ssrn.3210206

Filippo Curti

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

P.O. Box 27622
Richmond, VA 23261
United States

Atanas Mihov (Contact Author)

Federal Reserve Bank of Richmond ( email )

530 East Trade Street
Charlotte, NC 28202
United States

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