Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies

Anna Chernobai, Ali Ozdagli and Jianlin Wang

Journal of Monetary Economics, 2021, vol. 117, issue C, 418-440

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 deregulations of U.S. banks’ nonbanking activities as a natural experiment, we show that banks’ business complexity increases their operational risk. This result is driven by banks that had been constrained by regulations, compared with other banks and also with nonbank financial institutions that were never subject to these regulations. We provide evidence that managerial failure underlying these events offsets benefits of strategic risk taking.

Keywords: Operational risk; Bank holding companies; Financial deregulation; Glass–Steagall Act; Business complexity (search for similar items in EconPapers)
JEL-codes: G18 G20 G21 G32 L25 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies (2018)
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:eee:moneco:v:117:y:2021:i:c:p:418-440

DOI: 10.1016/j.jmoneco.2020.02.004

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