Bank charter values and operational risk

We examine how bank charter values affect banks' risk-taking strategies in area of operational risk. We investigate whether higher bank charter values influence banks' management incentives in more closely monitoring and managing operational risk (i.e., disciplinary effect of bank charter values), while controlling for other types of bank risk and bank characteristics. Using supervisory data for a sample of large US banks from 2000 to 2017, we construct a measure of bank operational risk exposure. We find that bank charter values are associated with operational risk exposure for several individual event types, specifically Internal and External Fraud, and Employment Practices and Workplace Safety, but not on aggregate, and any such association weakens after the 2008 financial crisis. We benchmark our main results by constructing alternative measures of operational risk exposures, leveraging approaches outlined in Basel II and Basel III bank capital standards. The results point at the sensitivity to the measures of operational risk using different time attributes of loss events and accounting data, as well as data granularity.