Understanding the Operational Risk Profile of Banks: An Empirical Analysis

Abstract

In the last ten years, operational risk has received a considerable attention from banking supervisors, practitioners and researchers alike. While the majority of studies have been devoted to derive the appropriate formulas for quantifying this risk (i.e. under pillar I of Basel II), less has been done to bring the so-called “operational risk profile” into scrupulous analysis. In this paper, we attempt to provide a better understanding of how the bank’s exposure to operational risk responds to changes brought into her operational risk profile. Using data collected from 16 large internationally active banks, our model shows a higher performance compared to previous studies. We find that operational loss amounts are more likely to increase when banks increase the number of employees per business unit, of customers, of geographic presence, and the volume of treated assets per employee, but decrease when banks increase their investments in information technology and the volume of treated assets per business unit.