When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank

Yuqian Xu, Tom Tan, Serguei Netessine

Research output: Working paper

Abstract

Operational risk is now among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulation. This paper studies how bank operational risk event frequency (or error rate) and severity (potential losses) are affected by workload to inform better labor decisions. To achieve this goal, we use a unique operational risk event data set from a commercial bank in China that contains 1,441 operational risk events in two years. We find that workload has a U-shaped impact on operational risk frequency. More specifically, the error rate of operational risk events would decrease first as workload increases and then increase. In addition, we show that workload has an inverted-U shaped impact on bank profit. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss bank capital allocation impact of changing the staffing level among branches so as to reduce operational risk losses and improve profit. We compare our optimal staffing policy with bank’s original policy, and estimate that the new staffing policy would reduce the current number of employees by 7.56%, which would further decrease the number of risk events by 4.51%, cut the total losses by 4.58%, and increase profits by 1.24%.
Original languageEnglish (US)
Number of pages32
DOIs
StatePublished - Nov 21 2017

Publication series

NameSMU Cox School of Business Research Paper
No.18-13

Fingerprint

Operational risk
Commercial banks
Workload
Profit
Staffing
Severity
Basel II
Event risk
Financial services industry
Capital allocation
Inverted-U
Bank capital
Employees
Labor
China

Keywords

  • Operational Risk
  • Workload
  • Frequency
  • Severity
  • Capital Allocation
  • Optimal Staffing

Cite this

When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank. / Xu, Yuqian; Tan, Tom; Netessine, Serguei.

2017. (SMU Cox School of Business Research Paper; No. 18-13).

Research output: Working paper

Xu, Yuqian ; Tan, Tom ; Netessine, Serguei. / When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank. 2017. (SMU Cox School of Business Research Paper; 18-13).
@techreport{cd18dbc3188242a4bc468d195cccc21e,
title = "When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank",
abstract = "Operational risk is now among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulation. This paper studies how bank operational risk event frequency (or error rate) and severity (potential losses) are affected by workload to inform better labor decisions. To achieve this goal, we use a unique operational risk event data set from a commercial bank in China that contains 1,441 operational risk events in two years. We find that workload has a U-shaped impact on operational risk frequency. More specifically, the error rate of operational risk events would decrease first as workload increases and then increase. In addition, we show that workload has an inverted-U shaped impact on bank profit. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss bank capital allocation impact of changing the staffing level among branches so as to reduce operational risk losses and improve profit. We compare our optimal staffing policy with bank’s original policy, and estimate that the new staffing policy would reduce the current number of employees by 7.56{\%}, which would further decrease the number of risk events by 4.51{\%}, cut the total losses by 4.58{\%}, and increase profits by 1.24{\%}.",
keywords = "Operational Risk, Workload, Frequency, Severity, Capital Allocation, Optimal Staffing",
author = "Yuqian Xu and Tom Tan and Serguei Netessine",
year = "2017",
month = "11",
day = "21",
doi = "10.2139/ssrn.3075452",
language = "English (US)",
series = "SMU Cox School of Business Research Paper",
number = "18-13",
type = "WorkingPaper",

}

TY - UNPB

T1 - When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank

AU - Xu, Yuqian

AU - Tan, Tom

AU - Netessine, Serguei

PY - 2017/11/21

Y1 - 2017/11/21

N2 - Operational risk is now among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulation. This paper studies how bank operational risk event frequency (or error rate) and severity (potential losses) are affected by workload to inform better labor decisions. To achieve this goal, we use a unique operational risk event data set from a commercial bank in China that contains 1,441 operational risk events in two years. We find that workload has a U-shaped impact on operational risk frequency. More specifically, the error rate of operational risk events would decrease first as workload increases and then increase. In addition, we show that workload has an inverted-U shaped impact on bank profit. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss bank capital allocation impact of changing the staffing level among branches so as to reduce operational risk losses and improve profit. We compare our optimal staffing policy with bank’s original policy, and estimate that the new staffing policy would reduce the current number of employees by 7.56%, which would further decrease the number of risk events by 4.51%, cut the total losses by 4.58%, and increase profits by 1.24%.

AB - Operational risk is now among the three most significant types of risks in the financial services industry, and its management is mandated by Basel II regulation. This paper studies how bank operational risk event frequency (or error rate) and severity (potential losses) are affected by workload to inform better labor decisions. To achieve this goal, we use a unique operational risk event data set from a commercial bank in China that contains 1,441 operational risk events in two years. We find that workload has a U-shaped impact on operational risk frequency. More specifically, the error rate of operational risk events would decrease first as workload increases and then increase. In addition, we show that workload has an inverted-U shaped impact on bank profit. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss bank capital allocation impact of changing the staffing level among branches so as to reduce operational risk losses and improve profit. We compare our optimal staffing policy with bank’s original policy, and estimate that the new staffing policy would reduce the current number of employees by 7.56%, which would further decrease the number of risk events by 4.51%, cut the total losses by 4.58%, and increase profits by 1.24%.

KW - Operational Risk

KW - Workload

KW - Frequency

KW - Severity

KW - Capital Allocation

KW - Optimal Staffing

U2 - 10.2139/ssrn.3075452

DO - 10.2139/ssrn.3075452

M3 - Working paper

T3 - SMU Cox School of Business Research Paper

BT - When Is the Root of All Evil Not Money? The Impact of Load on Operational Risk at a Commercial Bank

ER -