We document a robust negative relation between operational risk exposure and bank capital levels for a sample of large U.S. banks under the Basel I Capital Accords. The results are consistent with the notion that capital-constrained banks increased operational risk exposure at the time when Basel I regulations did not require an explicit capital charge for operational risk. More broadly, our results show new channel by which financial regulations incentivize banks to shift their risk taking to less regulated risk areas. We focus on the case of operational risk because it went from a largely unregulated risk type to a major risk that accounts for about 25% of large U.S. banks’ risk-weighted assets.

We examine how the threat of turnover affects bank CEOs' risk-taking behavior. Using a sample of 212 U.S. banks from 1995 to 2010, in contrast with prior studies focusing on non-banking firms, we find a non-monotonic relationship between CEO turnover threat and CEO risk-taking behavior in the banking industry. Bank CEOs increase their risk-taking when the perceived turnover threat is moderate but reduce risk-taking when turnover threat is more imminent. This effect tends to concentrate on banks with a majority of independent directors.