A Study On Management Of Operational Risk In Chinese Banking Under The New Basel Capital Accord

Along with the globalization of financial activities, the enrichment of financial products and the application of the up-to-date information technology, the risk of banks is becoming more and more intricate day by day. In order to control the risk more effectively, after a series of investigation and consulting, the Basel Committee on Banking Supervision proposed three pillars, namely, Minimum Capital Requirement, Supervisory Review Process, Market Discipline in the New Basel Capital Accord in it's final version, came out in June, 2004, In which the concept of operational risk was defined explicitly and three approaches were advanced to measure the operational risk. Obviously, the management of operational risk has come into the horizon of international banks' risk management. At present, many internationally high-class and active banks have made a positive definition of operational risk and collected loss data that are necessary for the operational risk measurement. Further more, they are trying to develop their own internal measurement models that are more appropriate for them to calibrate operational risk exactly. However, with regard to the banking industry in our country, the management of operational risk is still in blank, no matter in ideology or in action. Undoubtedly, there is a long way to go for Chinese banking to manage operational risk efficiently. In this paper, the major measuring approaches of operational risk are analyzed comparatively about their advantages, disadvantages and applicability in China. Considering the current state of banking industry practice in China, the author takes Shenzhen Development Bank and Pudong Development Bank for example, calculates the capital required on guard against operational risk roughly through Basic Indicator Approach and Standardized Approach. The findings indicate that it will be costly for Chinese banks to provide enormous required capital to guard against the operational risk according to the BaselⅡ.At the same time, it is impossible for Chinese banking industry to use the advanced measurement approaches to manage operational risk effectively because of lacking the basic conditions that are necessary for using the advanced measurement approaches which can contribute to less capital requirement resulting from precise operational risk management. For the sake of controlling operational risk more exactly in the future by using the advanced approaches, it is urgent for Chinese banks to do well in the fundamental domains such as data collection, IT platform construction, property right reform and organization structure renew from now on.