The Determinants of Operational Risk in U.S. Financial Institutions (original) (raw)
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Corporate Governance and Operational Risk: Empirical Evidence
International Journal of Economics and Financial Issues, 2020
The aim of this paper is to study the effect of governance mechanisms on the operational risk management of banks. A total of 1176 operational loss events recorded in 14 banks during the period 2006-2013 are analyzed to study the relation between the operational loss events and seven indicators of governance: the board size, the proportion of foreign administrators, the proportion of a government representative on the board, the proportion of institutional directors, the proportion of independent directors, the rotation of the director and the internal rating of the bank. The results show that only six governance mechanisms have significant effects on operational risk management. The size of the board of directors, the presence of independent directors, the presence of institutional directors, the presence of a state representative, the presence of foreign directors on the board of directors are positively and statistically significant with the severity operational losses. The results also state that the internal rating variable is negatively and statistically significant with the severity operational losses. But, the turnover hasn't any impact on the operational risk management.
SSRN Electronic Journal, 2000
We look at internal corporate governance mechanisms and the performance of publicly-traded U.S. banks before and during the financial crisis. Obviously, bank performance decreases dramatically during the crisis. This decrease occurs for all bank size groups. However, the largest banks see the largest losses. We find several measures of corporate governance, particularly CEO pay-for-performance sensitivity, executive ownership, and affiliated director ownership, decrease significantly just before and during the crisis. Large banks experience the largest changes in corporate governance. Finally, we find stronger relations between corporate governance variable changes and 2008 stock market returns for large banks than for small banks. JEL classification: G21, G30, G34
Risk management, corporate governance, and bank performance in the financial crisis
The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank's executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks' performance during the crisis. (M. Schmid). 1 There are also recent academic studies which emphasize that flaws in bank governance played an important role in the poor performance of banks during the financial crisis of (e.g., Diamond and Rajan, 2009. Also a recent OECD report concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements (Kirkpatrick, 2009). Moreover, argue that a strong and independent risk management is necessary to effectively manage risk in modern-day banks as deposit insurance protection and implicit too-big-to-fail guarantees weaken the incentives of debtholders to provide monitoring and impose market discipline. Moreover, the increasing complexity of banking institutions and the ease with which their risk profiles can be altered by traders and security desks makes it difficult for supervisors to regulate risks.
A review of operational risk in banks and its role in the financial crisis
The role of operational risk in the 2007/2008 financial crisis is explored. The factors that gave rise to the crisis are examined and it is found that although the event is largely regarded as a credit crisis, operational risk factors played a significant role in fuelling its duration and severity. It is concluded that, from an operational risk perspective, 2008 was the worst on record. Considering the extensive role of operational risk in global financial calamities, suggestions are made to improve the management of this risk type.
Corporate Ownership and Control, 2015
This paper aims to comprehensive insights regarding the link between CEO characteristics and investors´ risk in the financial services industry. The paper examines the relation among CEO incentive structures, CEO duality, and several measures of stockholders´ risk for samples of US banks and insurance firms. Our results provide empirical evidence that certain CEO characteristics are significantly related to equity investors´ risk: A CEO’s pay sensitivity to annual base salary and yearly bonus payment is negatively related to firm risk. The value of a CEO’s unvested options und unvested stock is also negatively related to firm risk. CEO duality appears to be negatively related to firm risk for banks but positively related to risk for insurance firms. Our findings have implications for shareholders who are provided by an empirical framework that takes into account CEO characteristics as non-traded human resource risk factor
In this paper, we look at the performance of publicly-traded U.S. banks before and during the financial crisis. Obviously, bank performance decreased dramatically during the financial crisis. This decrease occurred for all size banks. However, the biggest banks saw the largest losses. We also explore the extent to which corporate governance in the banking industry changed during the financial crisis and how corporate governance measures related to the performance of banks during the period of the crisis. We find that corporate governance, particularly CEO pay-for-performance sensitivity (PPS) and insider ownership, weakened significantly just before and during the financial crisis. Most interesting, we find that corporate governance variables had a significant impact on 2008 market returns for the largest banks and not as much for smaller banks, e.g., those banks with the strongest corporate governance controls performed best. However, just prior to the start of the financial crisis...
Risk management, corporate governance, and bank holding company performance in the financial crisis
The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank's executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks' performance during the crisis.
In this paper, we look at the performance of publicly-traded U.S. banks before and during the financial crisis. Obviously, bank performance decreased dramatically during the financial crisis. This decrease occurred for all size banks. However, the biggest banks saw the largest losses. We also explore the extent to which corporate governance in the banking industry changed during the financial crisis and how corporate governance measures related to the performance of banks during the period of the crisis. We find that corporate governance, particularly CEO pay-forperformance sensitivity (PPS) and insider ownership, weakened significantly just before and during the financial crisis. Most interesting, we find that corporate governance variables had a significant impact on 2008 market returns for the largest banks and not as much for smaller banks, e.g., those banks with the strongest corporate governance controls performed best. However, just prior to the start of the financial crisis, some banks, particularly larger banks, weakened their corporate governance controls (i.e., PPS and insider ownership) in place which led to more severe drops in market returns. At a time when corporate governance would have been vitally important, these banks experienced decreases in management monitoring.
Operational Risk Management in Financial Institutions: An Overview
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