With the accord entitled International Convergence of Capital Measurement and Capital Standards, issued by the Basel Committee on Banking Supervision in June 2006 (Basel II), operational risk in the banking sector came to be defined and regulated for the first time. It was defined explicitly as the risk of “loss resulting from inadequate or failed internal processes, people and systems or from external events”. Defined in this way, operational risk includes legal risk, but excludes strategic and reputational risk. Hence operational risk, originating from various shortcomings in operational mechanisms (including internal control systems) and organisational structures, mismanagement of human resources, and external events, emerges as a pure risk typical of corporate activity. Operational risk is mainly related to the strategic choices, operating methods and organisational characteristics of each bank. Differences in the breadth and uniformity of activities, organisational models and operational processes tend to have an impact on the configuration and dimension of operational risk across banks. It can also be presumed that the type of growth, whether internal or external, will have an impact on the qualitative and quantitative composition of operational losses. The purpose is to investigate the relationship between bank size and the qualitative and quantitative composition of operational risk. The chapter deals firstly with the definition and classification of operational risk, and the identification of dimensional variables relevant to the investigation of this relationship. Subsequently, the results of the most important data collections on operational losses conducted at an international level are presented and the critical aspects of data collection are discussed. The second part of the chapter tests empirically the hypothesis of a positive relationship between bank size and the scope and composition of operational risk by examining two M&A case studies, UniCredit-HVB and Intesa SanPaolo.
Bank size, Consolidation and Operational Risk
DE CRESCENZO, Veronica;PICHLER, Flavio
2010-01-01
Abstract
With the accord entitled International Convergence of Capital Measurement and Capital Standards, issued by the Basel Committee on Banking Supervision in June 2006 (Basel II), operational risk in the banking sector came to be defined and regulated for the first time. It was defined explicitly as the risk of “loss resulting from inadequate or failed internal processes, people and systems or from external events”. Defined in this way, operational risk includes legal risk, but excludes strategic and reputational risk. Hence operational risk, originating from various shortcomings in operational mechanisms (including internal control systems) and organisational structures, mismanagement of human resources, and external events, emerges as a pure risk typical of corporate activity. Operational risk is mainly related to the strategic choices, operating methods and organisational characteristics of each bank. Differences in the breadth and uniformity of activities, organisational models and operational processes tend to have an impact on the configuration and dimension of operational risk across banks. It can also be presumed that the type of growth, whether internal or external, will have an impact on the qualitative and quantitative composition of operational losses. The purpose is to investigate the relationship between bank size and the qualitative and quantitative composition of operational risk. The chapter deals firstly with the definition and classification of operational risk, and the identification of dimensional variables relevant to the investigation of this relationship. Subsequently, the results of the most important data collections on operational losses conducted at an international level are presented and the critical aspects of data collection are discussed. The second part of the chapter tests empirically the hypothesis of a positive relationship between bank size and the scope and composition of operational risk by examining two M&A case studies, UniCredit-HVB and Intesa SanPaolo.
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