Operational Loss Recoveries and the Macroeconomic Environment: Evidence from the U.S. Banking Sector

Frame, W. Scott; Lazaryan, Nika; McLemore, Ping; Mihov, Atanas

doi:10.24149/wp2215

Working Paper

Operational Loss Recoveries and the Macroeconomic Environment: Evidence from the U.S. Banking Sector

Abstract: Using supervisory data from large U.S. bank holding companies (BHCs), we document that operational loss recovery rates decrease in macroeconomic downturns. This procyclical relationship varies by business lines and loss event types and is robust to alternative data aggregations, macroeconomic measurement horizons and estimation methodologies. Further analysis shows that resource constraints faced by BHC risk management functions are a plausible explanation for these patterns. Our findings offer new evidence on how economic shocks transmit to banking industry losses with implications for risk management and supervision.

Keywords: Operational risk; Operational losses; Loss recoveries; Macroeconomic environment; Banking sector;

JEL Classification: G21; G28; G29;

https://doi.org/10.24149/wp2215