Are the Largest Banking Organizations Operationally More Risky?
49 Pages Posted: 29 Jul 2018 Last revised: 26 Jun 2019
Date Written: May 15, 2019
This study demonstrates that, among large U.S. bank holding companies (BHCs), the largest ones are exposed to more operational risk. Specifically, they have higher operational losses per dollar of total assets, a result largely driven by the BHCs' failure to meet professional obligations to clients and/or faulty product design. Operational risk at the largest U.S. institutions is also found to: (i) be particularly persistent, (ii) have a counter-cyclical component (higher losses occur during economic downturns), and (iii) materialize through more frequent tail-risk events. We illustrate two plausible channels of BHC size that contribute to operational risk -- institutional complexity and moral hazard incentives arising from "too-big-to-fail." Our findings have important implications for large banking organization performance, risk, and supervision.
Keywords: banking organizations, size, operational risk, tail risk, recessions
JEL Classification: G20, G21
Suggested Citation: Suggested Citation