Journal of Operational Risk

Changes in operational risk and its determinants under Covid-19

Zongrun Wang, Haiqin Fu and Ling Zhou

  • COVID-19 pandemic has a promote effect on the occurrence of bank’s operational risks especially in medium and large banks.
  • Business diversification increases the cost of supervision and makes banks’ internal control more complex, which positively moderates the COVID-19’s contribution to operational risk.
  • Banks with good regulatory records often have a complete internal regulatory system to manage their operational risk during the pandemic.

This examines the direct impact of the Covid-19 pandemic on the operational risk of Chinese commercial banks and the moderating effect of bank size, business diversification and regulatory records. To address the lack of data in operational risk studies, we gather financial statements on operational risk to obtain empirical proxy variables. We conduct an empirical study using 639 financial statements from 20 listed commercial banks in China from 2011 Q4 to 2021 Q3 and find that the Covid-19 pandemic has increased the operational risk of commercial banks. Moreover, business diversification, bank size and poor regulatory record significantly increase the operational risk effects of the pandemic. Finally, we test the robustness of our results, supporting our conclusions and providing new insights into the interaction between the Covid-19 pandemic and banks’ operational risk.

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