Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies
Journal of Banking & Finance, forthcoming
71 Pages Posted: 31 Jul 2018 Last revised: 12 Jul 2022
Date Written: November 22, 2021
While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk threatens financial stability. Using supervisory data on large U.S. Bank Holding Companies (BHCs), we find operational losses increase systemic risk through a direct channel that impairs market values of loss-experiencing BHCs as well as a channel of correlated losses that impact multiple institutions simultaneously. Findings are driven by tail events, more pronounced for systemically important and closer-to-distress BHCs, and vary by business lines, event types, and financial/economic environments. Our results extend the operational and systemic risk literatures and have key policy implications.
Keywords: Banking, Operational Risk, Systemic Risk
JEL Classification: G15, G18, G19, G21, G32
Suggested Citation: Suggested Citation