Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies

60 Pages Posted: 31 Jul 2018 Last revised: 11 Jun 2019

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Filippo Curti

Federal Reserve Banks - Federal Reserve Bank of Richmond

Atanas Mihov

Federal Reserve Bank of Richmond

John Sedunov

Villanova University - Department of Finance

Date Written: September 15, 2018

Abstract

While operational risk is generally perceived as idiosyncratic and having limited systemic implications, we document that operational risk poses a significant threat to financial system stability. Using supervisory data on large U.S. bank holding companies (BHCs) over 2002:Q1- 2016:Q4, we find that operational losses significantly increase systemic risk through direct channels that impair the market values of loss-experiencing BHCs and through spillover channels to related institutions. The findings are driven by high-severity tail events, are more pronounced for systemically important and closer-to-distress BHCs, and vary by business lines, event types, and financial and economic environments.

Keywords: Banking, Operational Risk, Systemic Risk

JEL Classification: G15, G18, G19, G21, G32

Suggested Citation

Berger, Allen N. and Curti, Filippo and Mihov, Atanas and Sedunov, John, Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies (September 15, 2018). Available at SSRN: https://ssrn.com/abstract=3210808 or http://dx.doi.org/10.2139/ssrn.3210808

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Filippo Curti (Contact Author)

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

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

Atanas Mihov

Federal Reserve Bank of Richmond ( email )

530 East Trade Street
Charlotte, NC 28202
United States

John Sedunov

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

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