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Journal of Banking & Finance Vol. 143 2022

Operational Risk is More Systemic than You Think: Evidence from U.S. Bank Holding Companies

Allen N. Berger1; Filippo Curti2; Atanas Mihov3; John Sedunov4

1 University of South Carolina · 2 Federal Reserve Bank of Richmond · 3 University of Kansas · 4 Villanova University

Abstract

While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk threatens financial stability. Using supervisory data on large U.S. Bank Holding Companies (BHCs), we find operational losses increase systemic risk through a direct channel that impairs market values of loss-experiencing BHCs as well as a channel of correlated losses that impact multiple institutions simultaneously. Findings are driven by tail events, more pronounced for systemically important and closer-to-distress BHCs, and vary by business lines, event types, and financial/economic environments. Our results extend the operational and systemic risk literatures and have key policy implications.

DOI
10.1016/j.jbankfin.2022.106619
Volume
143
Pages
106619
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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