Utility Analysis Of Operational Risks In Commercial Banks

Recently, a lot of major cases have broken out continuously in our country's commercial banks and have caused enormous economic losses to the banks, which show that the commercial banks of our country are going through a severe test of operational risks. With the opening and globalization of banking, complex in bank business and application of IT, operational risk gradually has become an important theme in recent ten years. Operational risks are different from credit risks and market risks which are accepted actively, because operational risks should be relative to revenues as an inner-growth risk. The difference of management aim or utility functions can lead to invalidation of management and cause lots of operational risks. It offers an approach by combining the utility and risk preference . banks confirm their own risk preferences and risk tolerance according to their ability and condition, and preserve the balance and matching between them by counting the degree of risks and income . After obtain the probability law of outside uncertain factors and evaluation of utility function, leaders can use them to evaluate their policies. At the same time, they should identify the possible cases and made it under their risk fancy, which can insure the fixed aim. Most publications put emphasis on the introduction about quantitative method and managerial principle in the accord. On the contrary, there is little about appropriate managerial approaches by utility theory. This paper is based on situation that operational risks is becoming more severe . we discuss how to analyze operational risks by utility and how to maximize the utility from four parts.The first part describes motivation and the way of thought. It also describes study frame,innovation and scarcity.The second part describes study literature.The third part describes the recent situation,definition,characteristics,sorts of operational risks and ways of measurement significance of operational risks to commercial banks .It also describes the disparities between inside and outside countries.The forth part discusses utility analysis of the owners and operators for a personal point of view and analysis of risk cases. It also describes intension and development of utility theory characteristics of operational risks .This part describes the disparities between inside and outside countries,the relationship between utility theory and operational risks. We provide a theoretical analyzing framework by the trust-agent relationship from human resources. Personal risk and cheat is the most matter. Whereas operational risks can only be altered at a cost, hence the importance of taking expenses and revenues into account. This part analyzes operational risks from risk cases through utility and the risk attitude of leaders. We distinguish three broad types of operational risks according to the frequencies of loss events: nominal,ordinary and exceptional. For nominal operational risks, expected losses are much more important than risks, because they are more frequent and less severe .For ordinary risks, both risks and expected losses are significant because they are more frequent and more severe, which can reduce the whole risks in some sense. For exceptional operational risks, risks are much more important than expected losses because they are less frequent and more severe and may be a life threatening to financial institutions matter. At the same time, the risk attitude of leaders can influence the measures and the utility at same lost: nominal > ordinary > exceptional. I also analyze a certain examples.At last, combining with the points above and my working experience ,I give some measures from risk management,risk capital,risk data and risk transfer.This paper pays combine theory with practice and uses demonstration and deduction.The paper's new point is the management measures combining with utility theory, which breads away the unilateralism from management frame barely or from measurement model barely. This paper considers the productiveness of banks and analyzes from personality and impersonality combining with utility theory.In a word, by using the financial theory which is studied in my postgraduate period, I try to analyze operational risk management combining with utility theory in our commercial banks. However, for the limitation of my theory level, maybe there is still some error or slip. I expect to get direction from experts, and I will try my best to improve it in the future.