The Determinants of Operational Risk Losses

Abstract

In this paper, we investigate the association between international banks' operational losses and macro-financial variables, Governance Indicators and banks' specific covariates. We do so in a panel data setting, which includes both censoring (since losses below a given threshold are not reported) and attrition (since banks may not operate in a given Country over some fraction of the data temporal dimension), and allows for Country and bank specific fixed effects. We develop an asymptotic theory to estimate parameters of interest and their standard errors consistently, allowing us to conduct valid inference.

The results of our analysis uncover interesting links between macroeconomic and financial variables, Governance Indicators and banks' losses, whereas banks' specific variables seem to play a less prominent role.

Keywords: operational risk, panel data, incidental parameters, jackknife, censoring

JEL Classification: C33, C34, C55, C51, C52, G32, G21