Are the Largest Banking Organizations Operationally More Risky? — Journal of Money, Credit and Banking
The largest U.S. banks have grown significantly in the 21st century. In 2000, the four largest U.S. bank holding companies held combined assets accounting for 23 percent of the nation’s banking industry; by the end of 2016, that share had grown to 42 percent. Consolidation in the banking industry has been partly driven by technological changes, resulting in improved efficiency for large banking institutions. However, these efficiency gains have not translated into higher values for the largest bank holding companies, suggesting that there may also be costs to greater size.
Curti et al. explore one cost that may be larger for the biggest bank holding companies: operational risk. Operational risk refers to financial losses due to inadequate or failed internal processes, people and systems, or from external events. Operational risk is difficult to measure, but the authors leverage confidential supervisory data on operational losses submitted by 34 large U.S. bank holding companies in compliance with the Dodd-Frank Act. These bank holding companies accounted for 81 percent of U.S. banking industry assets in 2016. Curti et al. find that the largest bank holding companies are exposed to more operational risk, in the sense that they have higher operational losses per dollar of total assets. Moreover, operational risk at these largest bank holding companies is persistent over time, tends to surface in adverse economic conditions and manifests more frequently through high-severity rare events. These results suggest that the largest bank holding companies could benefit from tightened risk management practices and standards for operational risk.
