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

Anna Chernobai, Ali Ozdagli, Jianlin Wang

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
JournalJournal of Monetary Economics
DOIs
StateAccepted/In press - Jan 1 2020

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Keywords

  • Bank holding companies
  • Business complexity
  • Financial deregulation
  • Glass–Steagall Act
  • Operational risk

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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