Are the Largest Banking Organizations Operationally More Risky?

49 Pages Posted: 29 Jul 2018 Last revised: 26 Jun 2019

See all articles by Filippo Curti

Filippo Curti

Federal Reserve Banks - Federal Reserve Bank of Richmond

Atanas Mihov

Federal Reserve Bank of Richmond

W. Scott Frame

Federal Reserve Bank of Dallas

Date Written: May 15, 2019

Abstract

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

Curti, Filippo and Mihov, Atanas and Frame, W. Scott, Are the Largest Banking Organizations Operationally More Risky? (May 15, 2019). 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

W. Scott Frame

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

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