A Research On The Measurement Of Operational Risk Of China's Commercial Banks

In recent years, loss in operational risk incidents happened frequently, and the operational risk is one of the three main risks which the banks face. The New Basel Capital Accord, which was issued by Basel Committee in June 2004, brings the operational risk into the risk management framework and even requires banks taking operational risk into account when calculating the economic capital. On March 22,2005, China Banking Regulatory Commission published the Notice of CBRC on Enhancing Operational Risk Control, and required banks to keep away and control operational risk. And in order to promote the New Basel Capital Accord carrying out in our country, improve the capability of risk management of commercial banks, promote the effective of the capital regulation, on Feb.28,2007, the CBRC published the Guided Suggestions on the China banks carrying out the New Basel Capital Accord. So we need to improve the operational risk management level of our country. Under this background it has weighty operation significance to study operational risk measurement of our banking below the framework of New Basel Capital Accord.Measuring operational risk is the basic and precondition of operational risk management. How to use appropriate models and methods to measure operational risk and distill corresponding capital is a key matter. In recent years, domestic researches on operational risk of the commercial banks are mainly based on the New Accord, and most literatures have not considered the particularity and the facts of the China's banking system, only introduced the advanced measurement models and methods. And there are some literatures even omit the study of the attributes and concrete behavior of the operational risk, and jumped to the direct discussion of how to manage and take actions against operational risk. So this paper try to uncover the present conditions and attributes of the operational risk of China's commercial banks, search for the proper operational risk measurement methods for our commercial banks under China's actual conditions. The research of this dissertation is conducted against such a background and consists of five parts:The first part is the introduction and the retrospect of the papers of relevant topic. It mainly outlines the background of this research.The second part is a general summarization of the operation risk of commercial banks and it's measurement.Firstly,we define operational risk as the risk of loss resulting from inadequate or failed in internal processes, people and systemic from external events, according to the definition of the New Basel Capital Accord.Secondly, we give primary divisions according to the reason for the loss, the business type and the risk factor under the International standards, and we also give a division under the actual conditions of china's commercial banks.Thirdly, we distinguish the character of operational risk from other risksLastly, we give the introduction of the measurement methods of commercial bank's operational risk under the New Basel Capital Accord. There are three approaches proposed in the Accord. They are Basic Indicator Approach, Standardized Approach and Advanced Measurement Approaches, which include Internal Measurement Approach, Loss Distribution Approach, Extreme Value Theory Approach, Scorecard Approach. Banks could choose models according to their risk management environments and loss data collection. At the same time, we systematically introduce quantitative and qualitative models in operational risk measurement. These models could be divided into two categories, one is the top-down approaches, including Stock Factor Model, Income-based Model, Expense-based Model, Operating Leverage Model, Scenario Analysis and Risk Profiling Model; the other is the bottom-up approaches, including Asset-liability Management, Market Factor Model, Actuarial Loss Model, Casual Model, Operational Variance, Stress Test, Operational Checklist. These models give our options in the following econometric analysis.In the third part, according to the researches of domestic scholars using the public loss data of operational risk of China's commercial banks, we draw a conclusion, which shows the operational risk of China's commercial banks have such obvious characters as property rights, bank level, reform period, region factor, business type, loss type and account distribution. And we go further analyzing the characteristics and the causes of the Internal Cheating, the main type of operational risk loss.In the fourth part, we use the Income-based Model, which is one of the methods of the top-down approaches, and some fiscal information from the annual financial statements of five commercial banks in China, to evaluate their operational risks. And we draw a conclusion that the Income-based Model is workable according to compare the model effects with the analysis results of concrete loss incidents of the banks.In the fifth part, we analyze the problems of the measurement of China's commercial banks are facing now. They are lacking of data, inferior measurement tools, low risk management level. And we examine the applicability in China of these models under the New Basel Capital Accord. At last, we give some feasible suggestions for the operational risk measurement of China's commercial banks against China's risk measurement level and present conditions.The innovation of this dissertation lies in that, research on the operational risk measurement methods which adapt to China's present conditions and future developing trend. I use Income-based Model, analyze, compare and contrast the operational risk of five China's commercial banks. Comparing with the previously researches, this paper has improved on bank sample, external data and the indexes influencing the net profit. After several regressions, at last I pick up actual rate of increase of GDP and the bad loan rate these two indexes as explaining variables, this makes the model more scientific and persuasive. So it has breakthrough at the aspect of the econometric analysis of operational risk in China. At the same time, I give some feasible suggestions against the present situation and problems of the operational risk measurement of China's commercial banks. All of this will give a guide to the development and perfection of the operational risk measurement of China's commercial banks.