Relationship between operational risk management, size, and ownership of Indian banks

Sirus Sharifi · Arunima Haldar

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Banking stability, regulation, efficiency Banking Sector Performance and Management Risk Management in Financial Firms

Abstract

Purpose The purpose of this paper is to analyse the relationship between operational risk management (ORM), size, and ownership of Indian banks. This is important in the context of financial crisis experienced by developed countries due to lax regulation. Design/methodology/approach ORM practices of Indian banks are proxied by excess capital (over the required minimum capital for operational risk). Size of a bank is measured as deposits plus advances. Our sample includes 61 Indian banks during the period from 2010 to 2013. The authors empirically examine the impact of bank size on excess capital using panel data regression model. Findings The results suggest that size of Indian banks is inversely related to excess capital held by them for managing operational risk. The inverse relationship implies that smaller banks hold higher excess capital over the required minimum as per Basel norms. There is no significant relationship between ownership (public, private and foreign) and excess capital held by banks for managing operational risk. Practical implications The study has implications for Indian banks given the high level of losses due to bad loans, and the implementation of Basel III norms by the central bank, i.e. Reserve Bank of India. Social implications The study has implications for Indian financial system as a large percentage (about 33 per cent) of household savings are deployed in deposits with commercial banks and other financial institutions. The bank failure(s) can have disastrous consequences for the Indian economy as the capacity of the Indian financial system to withstand such shocks is highly doubtful. Originality/value There is very little evidence on ORM practices of Indian banks, and its relationship with size and ownership. The study assumes significance in the context of significant changes in the institutional and regulatory framework.

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References

1978Specification Tests in Econometrics 1987Competitive viability in banking 1991The dominance of inefficiencies over scale and product mix economies in banking 2010The Determinants of Bank Capital Structure 1982Scale Economies in Banking: A Restructuring and Reassessment 2007Operational Risk: A Guide to Basel II Capital Requirements, Models, and Analysis 2015Global systemically important banks: Assessment methodology and the additional loss absorbency requirement 2011The Determinants of Operational Risk in U.S. Financial Institutions

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