The Dynamic Effect of Operational Risk and Banking Stability

Document Type : Research Paper


1 Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran, Iran.

2 Department of Accounting, Faculty of Management And Accounting, Allameh Tabataba'i University, Tehran, Iran.

3 Faculty of Management, University of Tehran, Tehran, Iran.

4 Monetary and Banking Research Institute, Central Bank of Iran, Tehran, Iran.


Banks learn the core operational vulnerabilities of their businesses and detect the risk indicators according to the operation vulnerabilities. In the last decade, operational risk was the main reason for firms' collapse. Operational risk inside the credit, market, and liquidity risk can affect the banking stability, which has not been studied much so far. This paper aims to investigate the research gaps in operational risk based on the guidelines of the Bank for International Settlements (BIS) for operational risk. We study the relationship between banking stability and operational risk by using a comprehensive analysis of the effect of operational risk and size on banking stability. This research uses data from the Iranian banking system over the period 2006–2015. The results show that operational risk has a significantly negative relationship with banking stability, and this is more intensified when we consider the size and complexity of the bank. 


Main Subjects

Abdymomunov, A., & Mihov, A. (2019). Operational Risk and Risk Management Quality: Evidence from US Bank Holding Companies. Journal of Financial Services Research56(1), 73-93.
Altunbas, A., Lee, S. J., Rajasekaran, S. A., Schneider, J. P., & Pochan, D. J. (2011). Encapsulation of Curcumin in Self-Assembling Peptide Hydrogels as Injectable Drug Delivery Vehicles. Biomaterials, 32(25), 5906-5914.
Ames, M., Schuermann, T., & Scott, H. S. (2015). Bank Capital for Operational Risk: A Tale of Fragility and Instability. Journal of Risk Management in Financial Institutions8(3), 227-243.
Arellano, M., & Bover, O. (1995). Another Look at the Instrumental Variable Estimation of Error-Components Models. Journal of Econometrics, 68(1), 29-51.
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121-136.
Basak, S., & Buffa, A. M. (2016). A Theory of Operational Risk. Working Paper, Boston University, 352, 1-50.
Basel Committee on Banking Supervision. (2017). Basel III: Finalizing Post-crisis Reforms), Retrieved from
---------- (2016). Standardized Measurement Approach for Operational Risk, Retrieved from
---------- (2011). Principles for the Sound Management of Operational Risk), Retrieved from
---------- (2006). Observed Range of Practice in Key Elements of Advanced Measurement Approaches (AMA), Retrieved from
---------- (2001a). Basel II: the New Basel Capital Accord. Second consultative paper, Retrieved from
---------- (2001b).Working Paper on the Regulatory Treatment of Operational Risk, Retrieved from
Berger, A. N., & Bouwman, C. H. (2013). How does Capital Affect Bank Performance during Financial Crises? Journal of Financial Economics, 109(1), 146-176.
Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2017). Bank Competition and Financial Stability. In Bikker, J. A. and Spierdijk (Ed.), Handbook of Competition in Banking and Finance. New York: Edward Elgar Publishing.
Blair, R. D., & Heggestad, A. A. (1978). Bank Portfolio Regulation and the Probability of Bank Failure: Note. Journal of Money, Credit and Banking, 10(1), 88-93.
Blunden, T. (2003). Scorecard Approaches. Operational Risk: Regulation, Analysis and Management. New Jersey: Prentice Hall-Financial Times.
Böcker, K., & Klüppelberg, C. (2010). Multivariate Models for Operational Risk. Quantitative Finance10(8), 855-869.
Boyd, J. H., & De Nicolo, G. (2005). The Theory of Bank Risk Taking and Competition Revisited. The Journal of Finance60(3), 1329-1343.
Boyd, J. H., De Nicolò, G., & Jalal, A. M. (2006). Bank Risk-Taking and Competition Revisited: New Theory and New Evidence. Working Paper, International Monetary Fund, WPIEA2006297, 1-40.
Chernobai, A., & Rachev, S. (2006). Applying Robust Methods to Operational Risk Modeling. Journal of Operational Risk1(1), 27-41.
Chernobai, A., Jorion, P., & Yu, F. (2008). The Determinants of Operational Losses. 18th Annual Derivatives Securities and Risk Management Proceedings of the Conference in Virginia, Retrieved from
Chernobai, A., Jorion, P., & Yu, F. (2011). The Determinants of Operational Risk in US Financial Institutions. Journal of Financial and Quantitative Analysis, 1, 1683-1725.
Chernobai, A., Ozdagli, A., & Wang, J. (2021). Business Complexity and Risk Management: Evidence from Operational Risk Events in US Bank Holding Companies. Journal of Monetary Economics, 117, 418-440.
De Jonghe, O. (2010). Back to the Basics in Banking? A Micro-Analysis of Banking System Stability. Journal of Financial Intermediation19(3), 387-417.
Dorogovs, P., Solovjova, I., & Romanovs, A. (2013). New Tendencies of Management and Control of Operational Risk in Financial Institutions. Procedia-Social and Behavioral Sciences99, 911-918.
Eckert, C., & Gatzert, N. (2017). Modeling Operational Risk Incorporating Reputation Risk: An Integrated Analysis for Financial Firms. Insurance: Mathematics and Economics72, 122-137.
Esterhuysen, J. N., Van Vuuren, G., & Styger, P. (2010). The Effect of Stressed Economic Conditions on Operational Risk Loss Distributions. South African Journal of Economic and Management Sciences13(4), 577-592.
Esterhuysen, J. N., Van Vuuren, G., & Styger, P. (2011). The effect of stressed economic conditions on credit risk in Basel II. South African Journal of Economic and Management Sciences, 14(2), 122-137.
Ferreira, S. (2015). Measuring Reputational Risk in the South African Banking Sector (Doctoral Dissertation, North-West University, Potchefstroom). Retrieved from
Ferreira, S., & Dickason-Koekemoer, Z. (2019). A Conceptual Model of Operational Risk Events in the Banking Sector. Cogent Economics & Finance7(1), 1-19.
Giraud, J. R. (2005). Managing Hedge Funds’ Exposure to Operational Risks. In E. Davis (Ed.), Operational Risk: Practical Approaches to Implementation. London: Risk Books.
Gropp, R., & Heider, F. (2009). The Determinants of Bank Capital Structure. Working Paper, European Central Bank, 1096, 1-52.
Hassanein, M., Bouaddi, M., & Karim, T. (2019). Measurement of Operational Risk Regulatory Capital in the Banking Sector: Developed Countries versus Emerging Markets. Journal of Operational Risk16(1), 1-32.
Hess, C. (2011). The Impact of the Financial Crisis on Operational Risk in the Financial Services Industry: Empirical Evidence. The Journal of Operational Risk6(1), 23-30.
Holmes, M. (2003). Measuring Operational Risk: A Reality Check. Risk, 16, 84– 87.
Houston, J. F., Lin, C., Lin, P., & Ma, Y. (2010). Creditor rights, information sharing, and bank risk taking. Journal of financial Economics, 96(3), 485-512.
Janakiraman, K., & Manavalan, R. (2008). Studies on Effect of Piperine on Oral Bioavailability of Ampicillin and Norfloxacin. African Journal of Traditional, Complementary and Alternative Medicines5(3), 257-262.
Knaup, M., & Wagner, W. (2012). A Market-Based Measure of Credit Portfolio Quality and Banks' Performance during the Subprime Crisis. Management Science58(8), 1423-1437.
Köhler, M. (2014). Does Non-Interest Income Make Banks More Risky? Retail-Versus Investment-Oriented Banks. Review of Financial Economics23(4), 182-193.
Laeven, L., & Levine, R. (2009). Bank Governance, Regulation and Risk Taking. Journal of Financial Economics93(2), 259-275.
Lee, C. C., & Hsieh, M. F. (2013). The Impact of Bank Capital on Profitability and Risk in Asian Banking. Journal of International Money and Finance, 32, 251-281.
Li, Y., Allan, N., & Evans, J. (2017). An Analysis of Operational Risk Events in US and European Banks 2008–2014. Annals of Actuarial Science11(2), 315-342.
Liikanen, E. (2012). High-level Expert Group on Reforming the Structure of the EU Banking Sector, 2. Brussels: Bank of Finland.
Micocci, M., Masala, G., Cannas, G., & Flore, G. (2009). Reputational Effects of Operational Risk Events for Financial Institutions. Cagliari: University of Cagliari.
Mignola, G., Ugoccioni, R., & Cope, E. (2016). Comments on the Basel Committee on Banking Supervision Proposal for a New Standardized Approach for Operational Risk. Journal of Operational Risk11(3), 1-20.
Moosa, I. A. (2007). Operational Risk: A Survey. Financial Markets, Institutions & Instruments16(4), 167-200.
Muriithi, J. G., & Waweru, K. M. (2017). Liquidity Risk and Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Finance, 9(3), 256-265.
Ong, M. (2002). The Alpha, Beta and Gamma of Operational Risk. RMA Journal, 85, 34-50.
Peccia, A. (2003). Using Operational Risk Models to Manage Operational Risk (363–384). In C. Alexander (Ed.), Operational Risk: Regulation, Analysis and Management. London: Prentice Hall-Financial Times.
Peters, G., Shevchenko, P. V., Hassani, B., & Chapelle, A. (2016). Standardized Measurement Approach for Operational Risk: Pros and Cons. SSRN, 2789006, 1-18.
PWC. (2015). Operational Risk: The End of Internal Modelling? Retrieved from
Rajendran, M. (2012). Operational Risks involved in Banking Industries. Amity Global Business Review7, 1-10.
Roy, A. D. (1952). Safety First and the Holding of Assets. Econometrica: Journal of the Econometric Society, 1, 431-449.
Sturm, P. (2013). Operational and Reputational Risk in the European Banking Industry: The Market Reaction to Operational Risk Events. Journal of Economic Behavior & Organization85, 191-206.
Sweeting, P. (2017). Financial Enterprise Risk Management. Cambridge: Cambridge University Press.
Trung, M., Hsiao, C. L., Shen, D. B., & Chen, B. S. (2018). Impact of Operational Risk toward the Efficiency of Banking-Evidence from Taiwan’s Banking Industry. Asian Economic and Financial Review8(6), 815-831.
Vőneki, Z. T. (2018). Operational Risk after Crisis. Economy and Finance, 4(5), 1-15.
Wang, T., & Hsu, C. (2013). Board Composition and Operational Risk Events of Financial Institutions. Journal of Banking & Finance37(6), 2042-2051.
Xu, Y., Pinedo, M., & Xue, M. (2017). Operational Risk in Financial Services: A Review and New Research Opportunities. Production and Operations Management26(3), 426-445.