The Study On Operational Risk Management For Chinese Commercial Banks

One of the most important thoughts and innovations of New Basel Accord is thatit confirms the significant position of Operational Risk (OR) in riskmanagement of commercial banks. Nowadays, the international commercialbanks have been quickly following the New Basel Accord to take part in themanagement and prevention of operational risk. Our country has opened up bankindustry to run after the international excellent banks. However the ORmanagement has always been the weak-point for Chinese commercial banks. It isvery important and meaningful to solve operational risk problem.In order to manage operational risk, we must recognize the extension andconnotation of operational risk, which is the foundation work. Basel Accord putsforward operational risk during its logical development, and lists it as one of"Three Big Risks" in commercial banks. "The Three Pillars" are the lowestrequirements and standards for operational risk management. It is quitedisputable to define the connotation of operational risk management. The authormainly relies on New Basel Accord to define the definition, category andcharacter of operational risk, which reflects the guiding suggestion and trend ofinternational bank supervise.Operational risk management starts late in China. There are lacks in research ofOR managment. However we can not use all research outcome of developedcountry. We must consider the real situation of our country and work out aChinese-characteristic way of OR management for Chinese commercial banks.Those historical OR events and losses show the status quo for Chinese banks thatloss amount is high and quite harmful. From the comparison, we can clearly seethe difference of Chinese commercial banks that a lot of OR loss events are arisenfrom Fraud. The root causes are wrong property-rights and too much interventionby the government, lack of intact management framework, simpleness inqualified management skills and weakness in quantified management skills. As many Chinese commercial banks have reformed their property-rights, theauthor mainly focuses on the bank internal control to design and choose solutionfor Chinese commercial banks. With the combination of theory and practice, NewBasel Accord and the practice of international commercial banks, the idea ofsound operation principle and entire risk management and the Enterprised RiskManagmet(ERM) framework, the author proposes to set a sound and overallframework for OR management. The work can be divided into three major parts.The first part is the overall framework design for Chinese commercial bankswhich contains seven basic elements (strategy&policy, organizational chart,qualified management skills, quantified management skills, system, assuranceand culture environment). The second part is the design of process and its toolsfor OR management. The author designed the process ("risk strategy&policyset-risk assessment-risk treatment and continous improvement-riskreport-information exchage and feedback") and relative tools like Basel decisiontree, key control standard (KCS), key control self-assessment (KCSA), riskindicator (KRIs)/Scorecard Approaches, Reporting Minutes and so on.The thirdpart is filteration and application of the measurement model for Chinesecommercial banks. Basel committee has suggestted Basic Indicator Approach,Standardized Approach, Advanced Measurement Approach. Although Chinesecommercial banks can barely use the former two, the Advanced MeasurementApproach is our goal in long run. Because the OR loss in Chinese commercialbanks has a characteristic of High Frequency Low Impact showing a 'Fat-Taileddistribution', the POT model is recommended for capital allocation.The research aims to enhance the recognization of Chinese commercial banks bydefine of OR based on New Basel Accord, to find the sticking point by analysisof the status quo. and root cause of Chinese commercial banks, and to upgrade thelevel of OR management in Chinese commercial banks by solution designed andchosen.There are four innovation points in this paper. One innovation is that the authorsets the Game Theory Model between the Fraud and the commercial bank ORrisk management to analyze the internal cause of the situation from a theoretic view. The conclusion is that if Chinese commercial banks enhance the ORmanagement, a lot of OR issue can be avoid and it is a great importance forChinese commercial banks to set a sound OR management mechanism right nowThe second innovation is that the author designs an overall OR managementframework for Chinese commercial banks with reference of OR managementconcept conbining New Basel Accord, ERM and advanced OR managementdevelopment and practice. The author also focuses on the design of process andtools, which shows the maneuverability and practicality of this research.TheThird innovation is that the author picks out POT model by lots of objectcomparisons instead of subject decisions. The author also analyses how to usePOT model in computer software Matlab and S-Plus. This is the theoreticalinstruction. The forth innovation is that the author uses lots of stracture model intable or figure style to show the research outcome, which is more clearly, directlyand visiblebly.It is also convenient to use in real practice.Although there are lots of differences among Chinese commercial banks, theclear strategy, strong execution-force organization, smooth process, practical andeffective tools, high-tech system, accessible reporting process, quick response toemergency, multi-way of assurance and adaptable capital allocation model is thebasic and leading way.