Are the Largest Banking Organizations Operationally More Risky?

50 Pages Posted: 1 Jun 2020

See all articles by Filippo Curti

Filippo Curti

Federal Reserve Bank of Richmond - Quantitative Supervision & Research

W. Scott Frame

affiliation not provided to SSRN

Atanas Mihov

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2020

Abstract

This study demonstrates that, among large U.S. bank holding companies (BHCs), the largest ones are exposed to more operational risk. Specifically, they have higher operational losses per dollar of total assets, a result largely driven by the BHCs' failure to meet professional obligations to clients and/or faulty product design. Operational risk at the largest U.S. institutions is also found to: (i) be particularly persistent, (ii) have a counter-cyclical component (higher losses occur during economic downturns) and (iii) materialize through more frequent tail-risk events. We illustrate two plausible channels of BHC size that contribute to operational risk – institutional complexity and moral hazard incentives arising from “too-big-to-fail." Our findings have important implications for large banking organization performance, risk and supervision.

Keywords: Banking organizations, Size, Operational risk, Tail risk, Recessions

JEL Classification: G20, G21

Suggested Citation

Curti, Filippo and Frame, W. Scott and Mihov, Atanas, Are the Largest Banking Organizations Operationally More Risky? (May, 2020). FRB of Dallas Working Paper No. 2016, Available at SSRN: https://ssrn.com/abstract=3614205 or http://dx.doi.org/10.24149/wp2016

Filippo Curti (Contact Author)

Federal Reserve Bank of Richmond - Quantitative Supervision & Research ( email )

United States

W. Scott Frame

affiliation not provided to SSRN

No Address Available

Atanas Mihov

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

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

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