Are the Largest Banking Organizations Operationally More Risky?

Abstract

AbstractThis study demonstrates that, among large U.S. bank holding companies (BHCs), the largest ones are exposed to more operational risk. Specifically, they have higher operational losses per dollar of total assets, a result largely driven by the BHCs' failure to meet professional obligations to clients and/or faulty product design. Operational risk at the largest institutions is also found to: (i) be persistent, (ii) have a countercyclical component, and (iii) materialize through more frequent tail risk events. We illustrate three plausible channels linking BHC size and operational risk—institutional complexity, moral hazard incentives arising from “too‐big‐to‐fail,” and innovation.