Abstract
The aim of this paper is to study the effect of governance mechanisms on the operational risk management of banks. A total of 1176 operational loss events recorded in 14 banks during the period 2006-2013 are analyzed to study the relation between the operational loss events and seven indicators of governance: the board size, the proportion of foreign administrators, the proportion of a government representative on the board, the proportion of institutional directors, the proportion of independent directors, the rotation of the director and the internal rating of the bank. The results show that only six governance mechanisms have significant effects on operational risk management. The size of the board of directors, the presence of independent directors, the presence of institutional directors, the presence of a state representative, the presence of foreign directors on the board of directors are positively and statistically significant with the severity operational losses. The results also state that the internal rating variable is negatively and statistically significant with the severity operational losses. But, the turnover hasn't any impact on the operational risk management.Keywords: operational risk, operational loss events, corporate governance, Basel IIIJEL Classifications: G28, G34, G38DOI: https://doi.org/10.32479/ijefi.9861
Highlights
The aim of this paper is to study the effect of governance mechanisms on the operational risk management of banks
The banking sector has been marked, over the past decade, by many high profile operational loss events such as the bankruptcy of the Barings Bank in 1995, the financial losses of Allied Irish Bank in the early 2000s, the Societe Genrale in 2008, the subprime crisis, the loss of UBS Bank in 2011and the case of VTB Bank in 2015. These operational failures, which have shaken the operation of the banking business, have proved the extent of operational risks compared to other banking risks
This change in the functioning of the financial markets has caused a certain destabilization of the financial system and this following excessive risk taking by financial institutions, including banks
Summary
The aim of this paper is to study the effect of governance mechanisms on the operational risk management of banks. Banks have been characterized by high informational asymmetry [Caprio and Levine (2002), Levine (2004)], a high level of debt [Macey and O'Hara (2003)] and strong regulation [Prowse (1997)] These specificities of the banking activity revealed the importance of the role played by the internal mechanisms of governance in the prevention of the risks incurred more precisely the operational risks. The latter is defined as the risk of losses related to the failure or inadequacy of processes, internal systems, people or external events [BIS (2001 b)]. The study of governance, as a mechanism for managing operational risk, came the attention of the risk managers, shareholders, academics, professionals, governments and international organizations
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