Operational Risk Is More Systemic than You Think: Evidence from U.S. Bank Holding Companies
60 Pages Posted: 31 Jul 2018 Last revised: 14 Jan 2020
Date Written: January 10, 2010
While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk significantly threatens financial stability. Using supervisory data on large U.S. bank holding companies (BHCs) over 2002:Q1-2016:Q4, we find operational losses increase systemic risk through both direct channels that impair market values of loss- experiencing BHCs and spillover channels to related institutions. Findings are driven by 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. Results add to the operational risk 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