Systemic operational risk: Spillover effects of large operational losses in the European banking industry

Thomas Kaspereit (Department of Business Administration, Economics and Law, University of Oldenburg, Oldenburg, Germany)
Kerstin Lopatta (Department of Business Administration, Economics and Law, University of Oldenburg, Oldenburg, Germany)
Suren Pakhchanyan (Carl von Ossietzky Universitat Oldenburg, Oldenburg, Germany)
Jörg Prokop (Department of Business Administration, Economics and Law, University of Oldenburg, Oldenburg, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Publication date: 15 May 2017

Abstract

Purpose

The aim of this paper is to study the information content of operational loss events occurring at European financial institutions with respect to the announcing bank’s industry rivals from an equity investor’s perspective.

Design/methodology/approach

The authors conduct an event study to identify spillover effects of operational loss events using the Carhart (1997) four-factor model as a benchmark model. In addition, they conduct multiple regression analyses to investigate the extent to which firm-specific factors or the market environment affect abnormal returns.

Findings

They observe significant negative abnormal returns following operational loss announcements exceeding € 50 million for both the announcing firms and their competitors. In addition, they find that stock market reactions occur only within a very small event window around the announcement date, indicating a high degree of market efficiency. Finally, abnormal returns tend to be insignificant for smaller loss amounts.

Originality/value

While operational risk is often believed to be strictly firm-specific, the results show that large operational risk events are not purely idiosyncratic; rather, they are systemic in the sense that they have contagious effects on non-event banks. Thus, the authors shed new light on how operational risk affects equity investors’ investment behaviour in an opaque and highly interconnected banking market.

Keywords

Acknowledgements

The authors would like to thank the Association of German Public Sector Banks (Bundesverband öffentlicher Banken, VÖB) for providing access to the ÖffSchOR database.

Citation

Kaspereit, T., Lopatta, K., Pakhchanyan, S. and Prokop, J. (2017), "Systemic operational risk: Spillover effects of large operational losses in the European banking industry", Journal of Risk Finance, Vol. 18 No. 3, pp. 252-267. https://doi.org/10.1108/JRF-11-2016-0141

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Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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