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The Determinants of Operational Risk in U.S. Financial Institutions

Published online by Cambridge University Press:  06 June 2011

Anna Chernobai ,
Philippe Jorion  and
Fan Yu
Anna Chernobai
Affiliation:
Whitman School of Management, Syracuse University, 721 University Ave., Syracuse, NY 13244. annac@syr.edu
Philippe Jorion
Affiliation:
Merage School of Business, University of California at Irvine, Irvine, CA 92697. pjorion@uci.edu
Fan Yu
Affiliation:
Robert Day School of Economics and Finance, Claremont McKenna College, 500 E. 9th S., Claremont, CA 91711 and Shanghai Jiao Tong University. fyu@cmc.edu
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Abstract

We examine the incidence of operational losses among U.S. financial institutions using publicly reported loss data from 1980 to 2005. We show that most operational losses can be traced to a breakdown of internal control, and that firms suffering from these losses tend to be younger and more complex, and have higher credit risk, more antitakeover provisions, and chief executive officers (CEOs) with higher stock option holdings and bonuses relative to salary. These findings highlight the correlation between operational risk and credit risk, as well as the role of corporate governance and proper managerial incentives in mitigating operational risk.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1683 - 1725
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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