The Impact of Workload on Operational Risk: Evidence from a Commercial Bank
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 banks' operational risk event frequency (or error rate) is affected by the workload in order to inform better labor decisions. To achieve this goal, we use a unique data set from a commercial bank in China that contains 1,441 operational risk events over 16 months. 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. Based on the causal relationships between workload and operational risk events and profit, respectively, we discuss the bank capital allocation impact of changing the staffing level among branches to reduce operational risk losses. We find that employing a flexible staffing rule can significantly reduce the number of operational risk events by more than 3% under different scenarios. In addition, this significant performance improvement can be achieved by adding even a little bit of flexibility to the process by allowing employees to either switch their business lines in the same branch or switch branches within the same business lines on a quarterly basis.
Operational Risk, Workload, Frequency, Severity, Capital Allocation, Optimal Staffing
SMU Cox: IT & Operations Management (Topic)