Business complexity and risk management: Evidence from operational risk events in U.S. bank holding companies

•The post-crisis regulations emphasize the business complexity of banks.•Complexity weakens banks’ risk management, as evidenced by operational risk events.•These risk management weaknesses affect both banking and nonbanking activities.•Complexity does not significantly improve performance.•Manageri...

Full description

Saved in:
Bibliographic Details
Published inJournal of monetary economics Vol. 117; pp. 418 - 440
Main Authors Chernobai, Anna, Ozdagli, Ali, Wang, Jianlin
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.01.2021
Subjects
Bank holding companies
Business complexity
Financial deregulation
Glass–Steagall Act
Operational risk
Operational risk
Glass–Steagall Act
G20
G21
G32
Bank holding companies
Financial deregulation
Business complexity
L25
G18
Online AccessGet full text

Cover

More Information
Summary:•The post-crisis regulations emphasize the business complexity of banks.•Complexity weakens banks’ risk management, as evidenced by operational risk events.•These risk management weaknesses affect both banking and nonbanking activities.•Complexity does not significantly improve performance.•Managerial failure caused by complexity offsets the benefits of strategic risk taking. Recent regulatory proposals tie a financial institution’s systemic importance to its complexity. However, little is known about how complexity affects banks’ risk management. Using the 1996–1999 deregulations of U.S. banks’ nonbanking activities as a natural experiment, we show that banks’ business complexity increases their operational risk. This result is driven by banks that had been constrained by regulations, compared with other banks and also with nonbank financial institutions that were never subject to these regulations. We provide evidence that managerial failure underlying these events offsets benefits of strategic risk taking.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2020.02.004