Systemic operational risk: Spillover effects of large operational losses in the European banking industry
Article publication date: 15 May 2017
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.
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.
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.
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.
The authors would like to thank the Association of German Public Sector Banks (Bundesverband öffentlicher Banken, VÖB) for providing access to the ÖffSchOR database.
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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