Operational Risk Measurement Of Chinese Commercial Banks Based On Extreme Value Theory

From Barings to Societe Generale,these cases of operational risk's exposing alarm the international banking and the regulatory authorities again about the commercial risk management -- we should value the management and supervise the operational risk. Measuring is just the guarantee of the valid management.In this situation,by collecting the cases of commercial bank operational risk loss through public media,the paper linked the operational risk measurement with the commercial banks and discussed the problem of operational risk and the capital allocation, where our commercial banks can draw lessons from.The paper tried to use Extreme Value Theory to measure the commercial bank's operational risk.Aiming at the difficulty in selecting threshold,the paper put forward a new method using the Change Point Theory to select quantitative extreme distribution threshold.Based on the changing point, we measured the operational risk of the commercial bank, and aiming at the mutually construction between the operational risk type and the risk affairs, we put forward EVT-Copula model to calculate the sum of VaR value. The main content of the paper contains:1.We overviewed the definition of the basic operational risk, the frame of division and managing risk,and the theory and methods of measuring risks.In this paper, we focused on the suggestion that Basel II gave to operational risk measuring model, and also introduced the basic index method, standard method,advanced calculating model and the application scopes.2.Through the demonstration analysis of those cases we collected from the public medium, we analyzed our commercial banks' status, main characteristics and Mechanisms through these cases' type, time, risk type, property right,layer class, region and loss from the case, etc. Then we overviewed these operational risk loss affairs.3.Based on Change Point Theory, improved the method of selecting threshold in the extreme value distribution and realized quantitative-threshold selection.Extreme Value Theory has been widely used in the solutions of the distribution problems in the field of finance and insurance. When using Extreme Value Theory to solve the problem that commercial banks' operational risk loss data showing thickness distribution problems, selection of threshold, however, has long been treated as the key point and a difficult task to perform in the application. The fundamental and the basic method used in the selection of threshold value using Change Point Theory has been analyzed and numerical simulation has been performed by random sample generated from Burr distribution method, and a good result is obtained. Moreover, the empirical analysis is also carried out by using the $SP500 and Danish fire insurance data.4. Method of selecting threshold are based on improvements. Considering the operation risk loss cases' data collection, we calculated Chinese commercial banks' VaR and ES value at different confidence levels, and discussed Chinese commercial banks' capital allocation. We also used POT model in Extreme Value Theory on modeling, and selected threshold quantitatively area value through change point theory. Re-sampled with bootstrap, estimated the POT model parameter, and gave our commercial banks' VaR and ES value at different confidence levels. The result indicated that, the POT model which modeled with the bottom data exceeding threshold overcame the possibility of underestimate loss that classical VaR and ES method had, and depicted the bottom distribution information more deeply. Also it can usually lead good implicated result.5.We applied Copula function to analyze our country commercial bank s' various operational risks dependency set. It would widen the measurement of operational risk from one-dimension to multidimension. The adoption of Loss Distribution Approachesto measure operational risk needs to definite business type or affairs type combination, compute each business type/ the VaR of the affairs type value, then sum all business type/ affairs type the value could simply result in the gross begs the total capital that the operational risk requests.This had no consideration business /type, and did not match the actual circumstance. Therefore, based on the dependencies among various operation risks and the influence of operational risks, the paper used Copula function to establish the risks' dependent frame and used Copula-EVT model to calculate the sum of VaR value so as to do empirical analysis combining operation risk the loss data collected. The result expressed that t- Copula measure method can reduce at least 8% than the traditional direct addition method.Through measuring Chiese commercial banks' risk using Extreme Value Theory canprovide the entrance to operate our country's commercial banks' risks for Bank managers and financial institutions regulators.Because in extreme circumstance, the bank's non-expecting loss exceeds far ahead its common capital,the bank may not prepare enough fund to cope with this phenomenon beforehand. So external dependence exists,which is used to undertake the extreme loss,and the financing institutions have the necessity to take charge of the banking and choose objective and accurate methods to measure commercial banks' operational risk to provide a scientific basis to promote the commercial banks' risk management for Chinese commercial banks' operational risk capital allocation, and safeguard the stability of China's financial system.