A Study On Operational Risk Management Of Chinese Commercial Banks

In recent years, operational risk has led to huge losses in commercial banks and material impacts to social financial economy, which is being paid more and more attention by the world banking industry and supervisory authorities. Nowdays, Basel Committee on Banking Supervision (BCBS) ranks operational risk the third going after credit risk and market risk in 2004 New Capital Accord, and requires minimum regulatory capital on it definitely. But theoretic study on operational risk is lagged far behind the former two risks, and operational risk is the weakest field among the three big risks in the world-wide commercial banks.China is just at the beginning stage of market economy, operational risk exists widely in Chinese banking system. Because of improper operating and default internal control, commercial banks suffer a lot from frequent severe losses and bankruptcy, which influences financial efficiency and security of China to a certain degree. In 2005, Chinese Banking Regulatory Committee found an amount up to RMB 767 billion dollars of illegal operating through field check, which is equivalent to total assets of a medium-size shareholding commercial bank; Three former presidents of Guangzhou Kaiping Sub-branch of Bank of China successively steal totally up to USD 483 million by use of its management loopholes. Existing domestic and foreign literature mainly concentrates on operational risk's identity and capital measurement, and how to minimize the amount of required regulatory capital, which are unable to solve Chinese commercial banks'problems of operational risk well. So it is urgent as well as important to enchance a theoretic study on operational risk in accordance with the actual situation of China.This article explores relative management theory and sound practice of operational risk, designs a comprehensive resolving scheme of operational risk management in Chinese commercial banks. Its main goal is to urge Chinese commercial banks to take operational risk management into the enterprise-wide risk management system, promote a transformation of management gravity center from capital measurement to strengthening internal management, and finally improve banks'anti-risk ability as well as the synthesis competitive ability.Appling the basic principles and methodnologies of risk management, system economy, information economy and internal control theory, combining normal analysis and empirical analysis, as well as qualitative analysis and quantitative analysis, integrating with China's actual situation closely, putting operational risk into an enterprise-wide risk management system, from four aspects including identity, assessment, management and supervision of operational risk, based on a further study and analysis of forming causes and mechanism of operational risk, this article designs a basic assessment model and a simplified assessment model of value of operational risk management, establishes a"pyramid"management system of operational risk for Chinese commercial banks, and proposes constructive countermeasures and suggestions aimed at regulatory supervision and market discipline of Chinese banking industry respectively. This article's study has a certain theoretical value and important practice significance regarding to operational risk management in Chinese commercial banks.Main research work of this article is as follows:1. Studying deeply forming roots and mechanism of operational risk in Chinese commercial banks. First, applying basic principles of system economy, through a human-based roots'classification, this article raises types of operational risk events adaptive to Chinese commercial banks. And from two aspects of system root and human nature root, this article carries on a deep root analysis of operational risk, points out that compound functioning of system root and human nature root, leads to multible and complex roots of operational risk of Chinese commercial banks. Second, based on principal-agent and gaming theories of information economy, this article discusses the forming mechanism of operational risk in Chinese commercial banks. And through a gaming analysis of two relationships including principal-agent and posts restraints, this article proposes policy suggestions to enchance operational risk management. Last, this article verifies further the roots and forming mechanism of operational risk in Chinese commercial banks by an empirical analysis. It reveals that, operational risk in Chinese commercial banks is mainly caused by human factors. Among human-caused operational risk events, both frequency and loss amounts by high level bank managers are higher than by common bank employees. Among banking business lines, the frequency and loss impact of operational risk of commercial banking business is the highest.2. Resolving the question of assessment model of value of operational risk management of commercial banks. First, through analysis of risk management and value-at-risk theory, this article proposes a concept of value of operational risk management, and points out that value of risk management is the unique management attribute of operational risk. Second, through theoritic analysis of value of operational risk management, applying mathematical statistic method and technology, this article achieves a basic assessment model of value of operational risk management, and then obtains a simplified assessment model through introduction of the coefficient of value of operational risk management. Finally, this article carries on both theoretic and empirical analysis on the application of the assessment models. Theoretical application is mainly on two-dimensional classification according to the result of assessment model, and takes value maximization of operational risk management as the goal to carry on the management arrangement. Empirical analysis makes a good examination on the application of the simplified assessment model of value of the operational risk management. The empirical analysis reveals that, at present, operational risk management in Chinese commercial banks is seriously insufficient, and simultaneously demonstrates that the space of operational risk management in Chinese commercial banks is very large.3. Establishing an operational risk management system for Chinese commercial banks. First, based on the enterprise-wide risk management theory and basic principles of internal control, taking operational risk into line with the enterprise-wide risk management system, this article carries on a systematical analysis and research, puts out eight basic criterias and four essential factors of operational risk management system, which are environment, organization, process and supporting. By carrying on an organic conformity to four essential factors, this article constructs a"pyramid"management system of operational risk. Second, by dividing the four essential factors of management system further into eleven interdependent administration modules, this article studies the functioning mechanism of the"pyramid"management system. Finally, from the four essential factors respectively, this article launchs a thorough analysis on the construction of the"pyramid"management system of operational risk: good operational risk culture is the important internal environment of operational risk management for commercial banks, construction of a flat matrix organization system is a foundation of operational risk management, construction of an integrated-revolving-process management model based on two-dimensional classification and management alignment, is the core of operational risk management, a risk reporting system based on the key risk index, an incentive and restraint system on the foundation of appraisal, and an emergency system based on business continuousity plan, constitute the basic supporting system of operational risk management system.4. Studing exterior restraint system of operational risk in Chinese commercial banks. First, through a research on the relationship of regulatory supervision restraint and market discipline, this article points out that regulatory supervision restraint and market discipline are the two defensive lines of operational risk in commercial banks, and analyzes present situation of the exterior restraint in Chinese commercial bank. Second, aimed at improving the regulatory supervision system in China, this article proposes to transfer the supervision pattern from primarily direct supervision to primarily indirect supervision, take operational risk into the minimum regulatory capital requirement, enchance construction of the foundation system, design assessment system of operational risk management, adjust supervision emphasis among different levels of Chinese regulatory authority, establish a supervision coordination system headed by CBRC, and so on. Third, from determination of proper principles and standard of information disclosure, construction of accessory principles of information disclosure including accounting standards and accounting mechanism, this article proposes some valuable mentality based on information disclosure. Finally, this article points out that strengthening external audit and the banking industry autonomy are another two important supplements to exterior restraints of operational risk in Chinese commercial banks.Innovation points of this article mainly include:1. Further checking and recognizing the definition and classification of operational risk. On the foundation of operational risk definition given by the New Capital Accord, this article puts reputational risk and strategic risk into the scope of operational risk definition, makes operational risk definition more complete, which is helpful to the implementation of bank-wide operational risk management. At the same time, by consoldating actual situation of Chinese commercial banks, this article proposes aviewpoint of human-nature rooted classification, and carrys on a classification on the types of operational risk events, and proposes a two-dimensional classification method (value of risk management, value-at-risk) of operational risk, which is conducive to understanding, identity, assessment and management of operational risk in Chinese commercial banks.2. Applying basic princinples and methodnologies of system economy and information economy, based on a deep analysis of system root and human-nature root of operational risk, this article proposes that the interaction of system root and human-nature root leads to compound and multible causes of operational risk roots in Chinese commercial banks, which, under the driving action of imperfection of incentives and restraints, through a gaming of people interested of the two big relationships including principal-agent and post restraints, forms all kinds of compound types of operational risk.3. Based on theories of risk management and value-at-risk, deeply analyzing the characteristic and unique management attribute, this article creatively puts out the concept of value of operational risk management, and points out that the core of operational risk management is the assessment of value of operational risk management, designs a basic assessment model of value of operational risk management, and aims at the present insufficient database of Chinese commercial banks, designs and introduces a coefficient of value of operational risk management, furtherly proposes a simplified assessment model of value of operational risk management.4. Based on principles of banks'enterprise-wide risk management and internal control theory, this article explores a construction of"pyramid"management system of operational risk in Chinese commercial banks. From four essential factors including environment, organization, process and supporting, and its further eleven administration module, this article studies deeply the functioning mechanism of the"pyramid"management system, and proposes systematically definite countermeasures and mentality to construct the management system of operational risk, from the good operational risk culture, the flat matrix organization framework, the integrated-revolving-process management model and the supporting system based on three organic subsystem including risk reporting, incentives and restraints, and emergency plan.In brief, this article applies basic principles and methodnologies of risk management, system economy, information economy and internal control theory comprehensively, develops a deep study on operational risk management in Chinese commercial banks, which has a certain theoretical value and important practice significance regarding to operational risk management in Chinese commercial banks.