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Macroenvironmental determinants of operational loss severity

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  • Cope, Eric W.
  • Piche, Mark T.
  • Walter, John S.
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    Abstract

    We investigate the relationships between the severity of operational loss events reported in the banking sector and various regulatory, legal, geographical, and economic indicators. Based on a data sample of over 57,000 losses incurred in more than 130 countries reported by the Operational Riskdata eXchange (ORX) consortium, we identify the most relevant exposure indicators for losses in four Basel II event categories: Internal Fraud; External Fraud; Employment Practices and Workplace Safety; and Clients, Products and Business Practices. We find evidence of significant correlations between Internal Fraud and constraints on executive power and the prevalence of insider trading. Clients, Products and Business Practices losses are significantly related to securities and shareholder protection laws, restrictions on banking activity, supervisory power, and the prevalence of insider trading. Other event types are sensitive to per-capita GDP and a governance index.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 5 ()
    Pages: 1362-1380

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1362-1380

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Operational risk; Regulation; Basel II;

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    1. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers 1768, Harvard - Institute of Economic Research.
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      • La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
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    4. Allen, Linda & Bali, Turan G., 2007. "Cyclicality in catastrophic and operational risk measurements," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1191-1235, April.
    5. Dahen, Hela & Dionne, Georges, 2010. "Scaling models for the severity and frequency of external operational loss data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1484-1496, July.
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    7. Paul Povel & Rajdeep Singh & Andrew Winton, 2003. "Booms, Busts, and Fraud," Finance 0312007, EconWPA.
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