SPILL OVER EFFECTS OF OPERATIONAL LOSS EVENTS WITHIN THE SOUTH AFRICAN BANKING SECTOR

Year 2017, Volume: 9 Issue: 2, 181 - 197, 01.06.2017

Suné Ferreira Paul-francois Muzindutsi

Abstract

This study analysed return volatility after operational loss announcements
concerning major South African banks during 2000-2014. The sample of banks
that experienced losses over the sample period was compared with a sample of
unaffected banks, the banking index and the stock market index, to identify
whether the operational loss announcements had spill over effects on the whole
South African banking sector. Daily share returns were analysed using event study
methodology and the weighted moving average (EWMA) model. On one hand,
the results showed that the operational loss events for two of the affected banks
exerted no effect on the number of unaffected banks. On the other hand, the
operational loss events for the two remaining banks were found to have spill over
effects. The returns of the unaffected banks as well as the whole banking sector
were effected, which led to systemic risk. However, results revealed that
operational losses in the South African banks did not spill over to the stock
market. Overall, the findings indicate that the effect of operational losses may
depend on the level of integration between individual banks.

Keywords

Volatility, EWMA, operational losses, banks, South Africa