Impact of operational risk events on market value of South Africa banks

Abstract

With the increase in operational risk related events that has seen some of the major international banks going under we investigate the South African market reaction to public announcement of operational risk related loss events by analysing the financial impacts and possible spillover effects of announcement on the market value of the four biggest banks in South Africa. The objective of this thesis is to expose the hidden costs to banks for not having adequate operational risk management practices. The event study approached was used to estimate the cumulative abnormal returns and the following were observations from the analysis: • Evidence of significant negative abnormal returns in the announcing bank, following an announcement of a large operational loss event were found, which implies that the market value of announcing banks in South Africa is particularly sensitive to the announcement of operational risk events of an announcing bank. • Further evidence indicated that the market value decline or erosion of the announcing bank exceeded the actual operational risk event loss amount. • While transmission of announcing bank’s negative impacts to other non-announcing banks (negative intra-spillover effects - that the announcement of operational risk event losses in one bank causes contagion within the banking industry) were detected, the negative impacts were not necessarily applicable to all non-announcing banks. • On the other hand, while evidence of announcing bank’s negative impacts providing a competitive advantage to other non-announcing banks was detected, the positive reaction was found to not be the case in all banks analysed. The variation of results in the spillover effects on non-announcing banks could be attributed to the markets sensitivity to perceived risk exposure of other non-announcing bank (in a case of negative spillover effect) and perceived robustness, resilient and sustainable control environment of non-announcing banks (in a case of a positive spillover effect), to announcing banks’ operational risk loss event.