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
Date Written: September 15, 2018
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: Suggested Citation