Abstract
A country-level model is presented whereby operational loss severity is explained in terms of the size of the economy and governance indicators. Estimation and simulation results show that the average severity of operational losses is positively related to the size of the economy as measured by GDP and that improvement in governance indicators leads to a reduction in the severity of losses. The effect of governance indicators on operational risk can be attributed to the fact that these indicators pertain to the provision of deterrence against crime and to corporate governance, which has implications for internal controls within firms.
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