Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies

Anna Chernobai, Ali Ozdagli and Jianlin Wang
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Anna Chernobai: Syracuse University
Jianlin Wang: University of California Berkeley

No 1146, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Recent regulatory proposals tie a financial institution's systemic importance to its complexity. However, little is known about how complexity affects banks' risk management. Using the 1996-1999 deregulation of banks' nonbanking activities as a natural experiment, we show that U.S. banks' operational risk increased significantly with their business complexity. This trend is stronger for banks that were constrained by regulations beforehand, especially for those with a Section 20 subsidiary, compared to other banks and also to nonbank financial institutions that were never subject to these regulations. We provide evidence that this pattern results from managerial failure rather than strategic risk taking.

Date: 2018
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies (2021)
Working Paper: Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1146

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