Fraud Recovery and Country Governance : Evidence from Operational Losses of U.S. Bank Holding Companies

Using regulatory data from financial institutions on fraud-related losses in foreign markets, we find large differences in recovery rates across countries. Specifically, losses in countries with poor governance have lower recoveries. Such results are driven by dimensions such as control of corruption, rule of law, regulatory quality and government effectiveness as opposed to other dimensions such as political stability, and voice and accountability. We also document interaction effects between country governance and risk management quality suggesting stronger governance effects on fraud recovery for institutions with poor risk management. This paper presents unique evidence tying international market characteristics with operational risk