Does digital transformation matter for operational risk exposure?

Md Hamid Uddin, Sabur Mollah, Nazrul Islam and Md Hakim Ali

Technological Forecasting and Social Change, 2023, vol. 197, issue C

Abstract: Basel Committee recommends banks maintain a capital buffer for operational risk exposure based on business volumes, assuming aggressive actions for quicker business growth could increase risk exposures. We argue that technological innovations expose banks to more operational risk because technology helps increase business volume, but system failure, problems with internal processes, and disruptions from external and internal security threats are inherent to technology. Based on 10 years of data for 264 banks from 43 countries, we find that digitalized banking operation is an underlying driver of operational risk that comes with increased business volume. Banks proactively take more operational risks by increasing cyber spending to tackle FinTech competition in the digitalized economy. Digitalization could generally matter for operational risk exposure, but the natural experiment does not find cybersecurity threats per se could increase operational risks even though cybersecurity appears to be a serious threat to digital banking. The study creates new avenues for future research.

Keywords: Operational risk; Digitalization; Cyber technology; Cybersecurity; Bank (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:tefoso:v:197:y:2023:i:c:s0040162523006042

DOI: 10.1016/j.techfore.2023.122919

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