The choice of a model to measure the impact of losses from operational banking risks on profitability

Abstract

In an unstable environment, the growth of the banking activity leads to the emergence of more and more harmful risks, ranging from financial risk to operational risk. The latter can be subdivided into two categories, controllable risks and non-controllable risks. The first category includes losses resulting from process failures, human errors, and IT failures.

The losses caused by these risks can be measured in billions of dirhams and have been the cause of many bankruptcies. Awareness of the impact of this risk is encouraging institutions to deploy the necessary management tools.

Several studies were carried out in the 1980s to examine the impact of risk on profitability and found negative relationships between risk in general and profitability. The results obtained initially confirm those obtained by previous research on risk in Morocco, concluding that operational risk charges negatively impact profitability as a first step of research. The present work proposes to enrich the current literature that focuses on operational risk in banking institutions in Morocco. The objective is to choose the appropriate model to measure the impact of operational risk especially for Moroccan banks, and to target the most dangerous types of risks according to their severity and their influence on bank profitability.

The combinations of several observations as the variable to be explained i.e. the net banking product is stationary in first difference, the order of integration of the retained variables varies between 0 and 1 as well as the absence of a causal relationship between the explanatory variables and the variable to be explained allowed us to find the relevant model it is the ARDL model to measure the charges of the operational risk on the banking profitability. Nevertheless, our research has some limitations, including the size of the sample, given the application of operational risk management methods by Moroccan banks, as well as the lack of depth in terms of time since the transition to Basel II in Morocco.

JEL Classification: G20

Paper type: Empirical research