IDEAS home Printed from https://ideas.repec.org/a/eee/reensy/v105y2012icp3-12.html
   My bibliography  Save this article

The financial crisis in an operational risk management context—A review of causes and influencing factors

Author

Listed:
  • Andersen, L.B.
  • Häger, D.
  • Maberg, S.
  • Næss, M.B.
  • Tungland, M.

Abstract

Global macroeconomic imbalance combined with deregulation of US banks and increasing US real estate prices formed the basis for aggressive growth in worldwide trading of so called Collateralized Debt Obligations (CDO), i.e. similar loans pooled to create a financial derivative that can be bought or sold. The CDOs consisted mainly of prime and subprime housing loans, where the latter type is characterized by a high probability for default. Due to the growing market demand for this derivative and the subsequent shortage of prime loans, the subprime share in the CDOs increased from 43% to 71% from 2003 to 2007. Surprisingly the credit rating agencies did not change the top level (AAA) credit rating of the CDOs in the same period of time. How was this possible? And how could the tremendously resourceful firms that insured the derivatives by selling so called Credit Default Swaps to CDO owners avoid understanding the enormous risk they took on? What later was to be called the financial crisis emerges in the spring of 2008 in line with the fall in US real estate prices and subsequent evaporation of the CDO market. The chain of events that led to numerous bankruptcies and threw the world into a recession not seen since the early 1930s has been labeled a system crisis, liquidity crisis, and a crisis of confidence (in the financial markets) among others. In this paper we survey how, and to what extent, operational risk exposure in the organizations of mortgage brokers and banks, insurance companies, credit rating agencies, and investment banks contributed to the financial crisis. Bayesian Network analysis of causes and influencing factors in these four types of organizations indicates that operational risk exposure played a crucial role in triggering the financial crisis. Our findings suggest that the financial crisis for a large part was the result of an industry wide failure to manage risk in general, and operational risk in particular.

Suggested Citation

  • Andersen, L.B. & Häger, D. & Maberg, S. & Næss, M.B. & Tungland, M., 2012. "The financial crisis in an operational risk management context—A review of causes and influencing factors," Reliability Engineering and System Safety, Elsevier, vol. 105(C), pages 3-12.
    • Handle: RePEc:eee:reensy:v:105:y:2012:i:c:p:3-12
    DOI: 10.1016/j.ress.2011.09.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0951832011001773
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ress.2011.09.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kevin Dowd, 2009. "Moral Hazard and the Financial Crisis," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 141-166, Winter.
    2. Jan Kregel, 2008. "Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market," Economics Public Policy Brief Archive ppb_93, Levy Economics Institute.
    3. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 33(4), pages 563-580, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ibsen Chivatá Cárdenas & Saad S. H. Al‐Jibouri & Johannes I. M. Halman & Wim van de Linde & Frank Kaalberg, 2014. "Using Prior Risk‐Related Knowledge to Support Risk Management Decisions: Lessons Learnt from a Tunneling Project," Risk Analysis, John Wiley & Sons, vol. 34(10), pages 1923-1943, October.
    2. Hernandez-Perdomo, Elvis & Guney, Yilmaz & Rocco, Claudio M., 2019. "A reliability model for assessing corporate governance using machine learning techniques," Reliability Engineering and System Safety, Elsevier, vol. 185(C), pages 220-231.
    3. Mariem Nsaibi & Ilyes Abidi & Mohamed Tahar Rajhi, 2020. "Corporate Governance and Operational Risk: Empirical Evidence," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 107-115.
    4. Jane Gathigia Muriithi & Kennedy Munyua Waweru, 2017. "Operational Risk, Bank Size and the Financial Performance of Commercial Banks in Kenya," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 6(3), pages 39-50, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ryoo, Soon, 2010. "Long waves and short cycles in a model of endogenous financial fragility," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 163-186, June.
    2. repec:hal:spmain:info:hdl:2441/153e5es3a8988omf0qkf000ql2 is not listed on IDEAS
    3. Marie-Laure Djelic & Joel Bothello, 2013. "Limited liability and its moral hazard implications: the systemic inscription of instability in contemporary capitalism," Post-Print hal-01891963, HAL.
    4. repec:spo:wpmain:info:hdl:2441/153e5es3a8988omf0qkf000ql2 is not listed on IDEAS
    5. Jean-Paul Laurent & Hassan Omidi Firouzi, 2022. "Market Risk and Volatility Weighted Historical Simulation After Basel III," Working Papers hal-03679434, HAL.
    6. Shazia Ghani, 2011. "A re-visit to Minsky after 2007 financial meltdown," Post-Print halshs-01027435, HAL.
    7. Baah Aye Kusi & Lydia Adzobu & Alex Kwame Abasi & Kwadjo Ansah-Adu, 2020. "Sectoral Loan Portfolio Concentration and Bank Stability: Evidence from an Emerging Economy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 19(1), pages 66-99, April.
    8. Michael Wosser, 2015. "The Determinants of Systemic Banking Crises A Regulatory Perspective," Economics Department Working Paper Series n265-15.pdf, Department of Economics, National University of Ireland - Maynooth.
    9. Daniel Attah-Kyei & Charles Andoh & Saint Kuttu, 2023. "Risk, technical efficiency and capital requirements of Ghanaian insurers," Risk Management, Palgrave Macmillan, vol. 25(4), pages 1-27, December.
    10. Peter J. Boettke & Alexander W. Salter & Daniel J. Smith, 2018. "Money as meta-rule: Buchanan’s constitutional economics as a foundation for monetary stability," Public Choice, Springer, vol. 176(3), pages 529-555, September.
    11. Justyna Przychodzen, 2012. "The economic costs of economic risk in the financial market (Europejskie rynki finansowe w obliczu globalnego kryzysu)," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 10(39), pages 54-63.
    12. Teodoro Dario Togati, 2012. "How to Explain the Persistence of the Great Recession? A Balanced Stability Approach," Working papers 014, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    13. Meyland, Dominik & Schäfer, Dorothea, 2021. "Home Bias in Sovereign Exposure and the Probability of Bank Default – Evidence From EU-Stress Test Data," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242453, Verein für Socialpolitik / German Economic Association.
    14. Nicolas Cachanosky, 2014. "The Mises-Hayek business cycle theory, fiat currencies and open economies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 27(3), pages 281-299, September.
    15. Charpe, Matthieu & Flaschel, Peter, 2013. "Workers’ debt, default and the diversity of financial fragilities," Structural Change and Economic Dynamics, Elsevier, vol. 27(C), pages 48-65.
    16. Gerald Epstein, 2014. "Restructuring finance to promote productive employment," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(2), pages 161-170, September.
    17. Mohammad Sharik Essa & Evangelos Giouvris, 2023. "Fama–French–Carhart Factor-Based Premiums in the US REIT Market: A Risk Based Explanation, and the Impact of Financial Distress and Liquidity Crisis from 2001 to 2020," IJFS, MDPI, vol. 11(1), pages 1-39, January.
    18. Muhammad Zeeshan Younas, 2020. "How Did Risk Management Methods Change After The 2007 Sub-Prime Mortgage Crisis In The United Kingdom?," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 9(1), pages 22-31, March.
    19. Acheson Graeme G. & Hickson Charles R & Turner John D, 2010. "Does Limited Liability Matter? Evidence From Nineteenth-Century British Banking," Review of Law & Economics, De Gruyter, vol. 6(2), pages 247-273, December.
    20. Castro, Cesar D., 2015. "Riesgo sistémico en el sistema financiero peruano," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 29, pages 77-90.
    21. Mirela PANAIT & Irina RADULESCU & Catalin VOICA, 2018. "Financial Inclusion and Vulnerabilities Generated by the International Crisis," Romanian Journal of Economics, Institute of National Economy, vol. 47(2(56)), pages 71-81, Decembre.
    22. Stockhammer, Engelbert & Wildauer, Rafael, 2018. "Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries," Review of Behavioral Economics, now publishers, vol. 5(2), pages 85-121, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reensy:v:105:y:2012:i:c:p:3-12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/reliability-engineering-and-system-safety .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.