TY - JOUR
T1 - Business complexity and risk management
T2 - Evidence from operational risk events in U.S. bank holding companies
AU - Chernobai, Anna
AU - Ozdagli, Ali
AU - Wang, Jianlin
N1 - Funding Information:
We thank Azamat Abdymomunov, Suleyman Basak, Mitchell Berlin (FDIC/JFSR conference discussant), Andrea Buffa, Mark Carey, Brian Clark, Nicola Cetorelli, Christopher Foote, Linda Goldberg, Sean Hundtofte (Operational Risk Research Conference discussant), William Keeton (Stress Testing Conference discussant), Elena Loutskina (AFA discussant), Hamid Mehran, Atanas Mihov, Abena Owusu (FMA discussant), Matthew Plosser, Eric Rosengren, Haluk Unal, Paul Willen, Guillaume Vuillemey (Bank of France conference discussant), Vladimir Yankov (NFA discussant), Stavros Zenios, and in particular Victoria Ivashina and Joe Peek for useful discussions at various stages of this paper. Ozdagli thanks Monica Barbosa for research support. We thank seminar participants at the 2017 American Finance Association meetings, the University of Chicago, the 2018 Northern Finance Association meetings, the 2018 FDIC/JFSR Annual Bank Research Conference, the 2018 Operational Risk Research Conference at the Federal Reserve Bank of Richmond, 2018 Society for Economic Dynamics meeting, the Federal Reserve Board, the Federal Reserve Bank of Boston, the Federal Reserve Bank of New York, the Federal Reserve Bank of Richmond, the 2017 Monitoring Large and Complex Institutions conference at the Bank of France, the 2017 Quantitative Finance and Risk Analytics Workshop, the 2017 Financial Management Association meetings, and the 2016 Stress Testing Conference for helpful comments. We also thank Nicola Cetorelli for his generosity in providing us with his organizational structure data and IBM for providing us with operational risk data. The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.
Publisher Copyright:
© 2020 Elsevier B.V.
PY - 2021/1
Y1 - 2021/1
N2 - 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.
AB - 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.
KW - Bank holding companies
KW - Business complexity
KW - Financial deregulation
KW - Glass–Steagall Act
KW - Operational risk
UR - http://www.scopus.com/inward/record.url?scp=85081395052&partnerID=8YFLogxK
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U2 - 10.1016/j.jmoneco.2020.02.004
DO - 10.1016/j.jmoneco.2020.02.004
M3 - Article
AN - SCOPUS:85081395052
SN - 0304-3932
VL - 117
SP - 418
EP - 440
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -