Are the Largest Banking Organizations Operationally More Risky?

This study demonstrates that, among large U.S. bank holding companies (BHCs), the largest ones are exposed to more operational risk. Specifically, they have higher losses per dollar of total assets, a result largely driven by BHCs' failure meet professional obligations clients and/or faulty product design. Operational risk at institutions is also found to: (i) be persistent, (ii) countercyclical component, and (iii) materialize through frequent tail events. We illustrate three plausible channels linking BHC size risk—institutional complexity, moral hazard incentives arising from “too-big-to-fail,” innovation.