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

Author

Listed:
  • Anna Chernobai

    (Syracuse University)

  • Ali Ozdagli

    (Federal Reserve Bank of Boston)

  • Jianlin Wang

    (University of California Berkeley)

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.

Suggested Citation

  • Anna Chernobai & Ali Ozdagli & Jianlin Wang, 2018. "Business Complexity and Risk Management: Evidence from Operational Risk Events in U.S. Bank Holding Companies," 2018 Meeting Papers 1146, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:1146
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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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