Operational Loss Recoveries and the Macroeconomic Environment: Evidence from the U.S. Banking Sector

49 Pages Posted: 4 Aug 2022 Last revised: 21 May 2024

See all articles by W. Scott Frame

W. Scott Frame

Structured Finance Association

Nika Lazaryan

Federal Reserve Banks - Federal Reserve Bank of Richmond

Ping McLemore

Federal Reserve Banks - Quantitative Supervision & Research

Atanas Mihov

University of Kansas

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2024

Abstract

Using supervisory data from large U.S. bank holding companies (BHCs), we document that operational loss recovery rates decrease in macroeconomic downturns. This procyclical relationship varies by business lines and loss event types and is robust to alternative data aggregations, macroeconomic measurement horizons, and estimation methodologies. Further analysis shows that resource constraints faced by BHC risk management functions is a plausible explanation for these patterns. Our findings offer new evidence on how economic shocks transmit to banking industry losses with implications for risk management and supervision.

Keywords: Operational risk, operational losses, loss recoveries, macroeconomic environment, banking sector

JEL Classification: G21, G28, G29

Suggested Citation

Frame, W. Scott and Lazaryan, Nika and McLemore, Ping and Mihov, Atanas, Operational Loss Recoveries and the Macroeconomic Environment: Evidence from the U.S. Banking Sector (May 21, 2024). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4178208 or http://dx.doi.org/10.2139/ssrn.4178208

W. Scott Frame

Structured Finance Association ( email )

1776 I Street NW
#501
Washington, DC 20006
United States

Nika Lazaryan

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

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

Ping McLemore

Federal Reserve Banks - Quantitative Supervision & Research ( email )

United States

Atanas Mihov (Contact Author)

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

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