The Relationship Between Operational Risk Management And Internal Control System

Subsequent to China's entering into WTO, China's banking industry has enteredinto a new stage of reform and development. Accompany with business developmentof foreign banks in China and opening of banking market according to China'scommitment to WTO, the risk to China's banking industry is getting bigger. Hence,besides the continuous and rapid development, banks should also reinforce its effortson construction and reform of risk control system, formalize and enhance internalcontrol management so that to reduce the banking risks.Operational risk is not a new issue to financial institutions;rather, it is one of theoldest types of risks that banks encounter. Comparatively to the status of managerialskills in credit risk and market risk control, the focus of operational risk managementwas limited to internal audit in the past years with little advancement in technologyand structural design. As operational risk regulative capital requirements are formallystipulated in the New Basel Accord, which will become effective starting the end of2006, every global financial institution has to get ready for it.Through the study of management of banking operational risks and constructionof internal control systems, this paper discusses the relationship between operationalrisk and internal control. Major conclusions are that construction of internal control isthe effective approach to operational risk management. Establishment of operationalrisk management department and assignment of specific staff, as well as enhancementof construction of internal control system and setup of realistic internal controlmechanism are the effective approaches to operational risk management. Operationalrisk management and internal control are complementary. As long as both of them areunder good management, the bank's ability on risk management will be improvedbetter.