Working Paper: CEPR ID: DP14418
Authors: Inaki Aldasoro; Leonardo Gambacorta; Paolo Giudici; Thomas Leach
Abstract: We use a unique cross-country dataset at the loss event level to document the evolution and characteristics of banks’ operational risk. After a spike following the great financial crisis, operational losses have declined in recent years. The spike is largely accounted for by losses due to improper business practices in large banks that occurred in the run-up to the crisis but were recognised only later. Operational value-at-risk can vary substantially – from 6% to 12% of total gross income – depending on the method used. It takes, on average, more than a year for operational losses to be discovered and recognised in the books. However, there is significant heterogeneity across regions and event types. For instance, improper business practices and internal fraud events take longer to be discovered. Operational losses are not independent of macroeconomic conditions and regulatory characteristics. In particular, we show that credit booms and periods of excessively accommodative monetary policy are followed by larger operational losses. Better supervision, on the other hand, is associated with lower operational losses. We provide an estimate of losses due to cyber events, a subset of operational loss events. Cyber losses are a small fraction of total operational losses, but can account for a significant share of total operational value-at-risk.
Keywords: operational risks; financial institutions; cyber risks; time to discovery; value-at-risk
JEL Codes: D5; D62; D82; G2; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| favorable economic conditions during economic expansions (E32) | operational risk events (G21) |
| operational risk events (G21) | operational losses (G33) |
| prior economic conditions (N11) | operational losses (G33) |
| credit booms (F65) | operational losses (G33) |
| better regulatory supervision (G18) | lower operational losses (G33) |
| increased bank competition (G21) | reduced operational losses (G33) |
| macroeconomic conditions (E66) | operational losses (G33) |
| cyber losses (K24) | operational risks (G22) |