Diseconomies of Scale in Banking: Evidence from Operational Risk
52 Pages Posted: 29 Jul 2018
Date Written: April 15, 2018
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: Suggested Citation