Haste Makes Waste: Banking Organization Growth and Operational Risk

Abstract

This study shows that banking organization growth is associated with higher operational losses per dollar of total assets and incidence of tail risks. Event studies using M&A activity and instrumental variable regressions provide consistent evidence. The relationship between banking organization growth and operational risk varies by loss event types and balance sheet categories. We demonstrate that higher growth predicts worse operational risk realizations during the global financial crisis. These findings have implications for bank performance, risk management and supervision in a continually consolidating banking industry.

Keywords: Banking organizations, Operational risk, Mergers &, acquisitions, Growth

JEL Classification: G20, G21