The Determinants of Operational Risk in U.S. Financial Institutions

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,...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2011-12, Vol.46 (6), p.1683-1725
Main Authors: Chernobai, Anna, Jorion, Philippe, Yu, Fan
Format: Article
Language:English
Subjects:
Auditing
Bank capital
Banks
Basel Accord
Bonus systems
Business structures
Chief executive officers
Chief executives
Corporate governance
Credit risk
Credit systems
Enterprises
Financial institutions
Financial services
Fraud
Internal controls
Losses
Operational risk
Risk management
U.S.A
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Summary: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.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109011000500