Operational Risk Research Of Banking

The operational risk has a long history in banking, the management and precaution of which has been much concerned by many international banks for a long time. However, it was not widely concerned until the Basel Committee considered it as one of the three major banking risks. The New Basel Capital Accord is certainly going to be the new rules for international banking in that the operational risk is a major risk the international banking is facing, which has already lead to great loss for some banks.The New Accord suggests the new development in risk management, and new technology in international banking. Over 100 countries and regions are planning to conform to the Accord.The causes for the exiting and developing of operational risk is not deeply analyzed, though a lot of research work was been done by some foreign financial NGOs and researchers. The introduction of foreign research to China is focused on definition, management and estimation, basing on which this paper study the operational risk in four parts.Part I analyzes the necessity for the introduction of the New Basel Capital Accord in terms of banking reform. Horizontal merger, business congregation, vertical governance, and innovation in procedure, all characterize the banking revolution. The New Accord defines the operational risk as the risk resulting from insufficient or failure internal procedure, personnel, and system, or from external direct or indirect loss. In addition, the Accord fully categorizes the risk, basing on which the estimation is introduced, basic index method, standard method, and advanced econometric method.Part II analyzes the causes for the creation of operational risk in terms of a game theoretical framework, assuming the human beings are of limited rationality. The limited human capability to understand and decide will lead to agent-principal problem among banking personnel, shareholders, and customers, which is the source of operational risk. This paper, bashing on what is mentioned above, constructs a game model on banking personnel-banking supervisor relationship to analyze factors behind operational risk.Parts III compares the differences between Chinese banking and overseas banking. This paper, basing on the classification of banking into external governance one and internal governance one, analyzes the features of external and internal governance. This paper argues that operational risk in external governance is comparatively smaller than that in internal one. Banking governance in China belongs to the internal governance structure, which makes the operational risk be obvious. A case study is introduced to analyze the causes behind operational risk in Chinese banking.Part IV proposes three shields to warn and control the operational risk. The first shield is the construction of Chinese banking moral system, including the introduction of external social moral fibers and internal personal moral fibers, which can change the utility function of banking personnel. The second shield is the banking internal control, combining the introduction of international banking operational risk control experiences, and the practice of Chinese banking. The third shield is the transfer and alleviation of risk, including risk transfer method and risk financing method.The main contributions of this paper are listed as the following.I Under the assumption of human limited rationality, this paper analyzes the historic causes for the creation of operational risk, basing on a static game theoretical framework, and analyzes the decisive factors for the creation of operational risk, basing on a dynamic game theoretical framework, on the results of which this paper analyzes the necessity in development of modern banking operational risk.II This paper, according to differences in governance structure, categorizes two types of governance, internal one and external one, basing on which, and on the conclusion of the game theoretical framework constructed in this paper, differences in operational risk between Chinese banking and overseas banking are analyzed. Evidence is provided by a case study and a simple statistical analysis.III This paper proposes three shields for the operational risk control, especially the first shield, the construction of Chinese banking moral system, which is fully taking the source of operational risk creation, and the differences between Chinese and western cultures into account.