TY - JOUR
T1 - The determinants of operational risk in U.S. financial institutions
AU - Chernobai, Anna
AU - Jorion, Philippe
AU - Yu, Fan
N1 - Funding Information:
∗Chernobai, [email protected], Whitman School of Management, Syracuse University, 721 University Ave., Syracuse, NY 13244; Jorion, [email protected], Merage School of Business, University of California at Irvine, Irvine, CA 92697; and Yu, [email protected], Robert Day School of Economics and Finance, Claremont McKenna College, 500 E. 9th S., Claremont, CA 91711 and Shanghai Jiao Tong University. Special thanks go to Darrell Duffie and George Pennacchi (associate editor and referee) for extensive comments that led to a significant improvement of our paper. We also thank Thomas Barkley, Phelim Boyle, Long Chen, Hela Dahen, Steve Dimmock, Ted Fee, Zsuzsanna Fluck, Mike Gallmeyer, Lorenzo Garlappi, Jens Hilscher, Eric Hughson, Ravi Jagannathan, Naveen Khanna, Bing Liang, Paul Malatesta (the editor), Sattar Mansi, Kofi Appiah Okyere, Milena Petrova, Jiaping Qiu, Scott Richardson, Roberto Rigobon, Mark Schroder, Richard Sloan, Janet Smith, Richard Smith, Franck Taieb, Dragon Tang, Raja Velu, and seminar/conference participants at Barclays Global Investors, Claremont McKenna College, Georgia State University, McMaster University, Michigan State University, M&T Bank, Syracuse University, University of California at Riverside, University of Texas at Dallas, the 2008 OpRisk USA Conference, the 2nd McGill Risk Management Conference at Mont Tremblant, the 18th Annual Derivatives Securities and Risk Management Conference at the Federal Deposit Insurance Corporation (FDIC), the 2008 Financial Management Association (FMA) Annual Meeting in Grapevine, the 2009 Journal of Investment Management Spring Conference in San Francisco, and the 45th Annual Conference on Bank Structure and Competition at the Federal Reserve Bank of Chicago for constructive suggestions. We are grateful to Algorithmics Inc. (a member of the Fitch Group) for providing operational loss data. Chernobai acknowledges financial support from Syracuse University.
PY - 2011/12
Y1 - 2011/12
N2 - We examine the incidence of operational losses among U.S. financial institutions using publicly reported loss data from 1980 to 2005. We show that most operational losses can be traced to a breakdown of internal control, and that firms suffering from these losses tend to be younger and more complex, and have higher credit risk, more antitakeover provisions, and chief executive officers (CEOs) with higher stock option holdings and bonuses relative to salary. These findings highlight the correlation between operational risk and credit risk, as well as the role of corporate governance and proper managerial incentives in mitigating operational risk.
AB - We examine the incidence of operational losses among U.S. financial institutions using publicly reported loss data from 1980 to 2005. We show that most operational losses can be traced to a breakdown of internal control, and that firms suffering from these losses tend to be younger and more complex, and have higher credit risk, more antitakeover provisions, and chief executive officers (CEOs) with higher stock option holdings and bonuses relative to salary. These findings highlight the correlation between operational risk and credit risk, as well as the role of corporate governance and proper managerial incentives in mitigating operational risk.
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U2 - 10.1017/S0022109011000500
DO - 10.1017/S0022109011000500
M3 - Article
AN - SCOPUS:84857270763
SN - 0022-1090
VL - 46
SP - 1683
EP - 1725
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 6
ER -