Operational Risk Of Commercial Banks

Bank business is risk management, so that decides bank competence.Credit risk and market risk have been written into "capital agreement ofthe Basel" which have been minded by different bank. In fact operationrisk was talked about sometimes by some banks and defined indirectly as"the risk that cannot be put into market risk or credit risk". In September1998 the Basel Committee formally put forward operation risk, so BritainBanking Association defined it directly "the risk is the direct or indirectloss that is brought about by the imperfection or mistake of internalprocedure, personnel, system or outside event". "Capital agreement of the Basel" was revised three times and "newcapital agreement of the Basel" was published formally in June 2004 atlast in which operation risk adopted the definition of BBA and was valuedfully. Moreover operation risk was classified according to cause anddepartment. Operation risk was taken seriously eventually through care thoughtfrom 1998 until 2004. At this moment, the author has several questions toask. Why operation risk is valued? How does operation risk form on earth?How do we guard and supervise it to the end? Whether there is operationrisk in our bank? How do we do if there is operation risk.. So the paper takes operation risk as main clue and tries to unfold byrevolving around the questions and attempt to analyze it through newinstitutional economics. The paper sets forth the questions by five partscorrespondingly. First part, the summary of operation risk in the commercial bank.First we start the paper from understanding "risk valuation" in order tounderstand deeply risk supervision and then to supervise operation risk.As a matter of fact commercial bank is a machine that causes risk andsupervise it. So it is important that countries exchange experiences of risksupervision. For this purpose the Basel Committee acts that role and haswritten operation risk into "new capital agreement of the Basel", whichmeans that operation risk is more important in commercial banks. However, why operation risk was defined and classified by the BaselCommittee in the end and so was promoted in banks? That is what will bestudied deeply in this part. First operation risk is internal, controlled anddecisive. Second banks are revolting. First the organization moreemphasizes group cooperation and communication beyond departmentand function, so organization boundary begins blurred. Then managementmodel in bank is transforming from vertical model to level model, whichleads to more elastic management. And more information technology andinternet are used in banks, which facilitates bank management all theworld and restructure of business process. On the other side imperfectionand mishap of information and system could result in tremendous loss inbank. Third we reappear the tragedy of the Barlin bank which has beencaused by personnel, inter supervision and system matter. So the BaselCommittee must promote operation risk which is more important amongrisk supervision. Second part, the origin of operation risk. Although the BaselCommittee defined and classified operation and set forth different type ofthat through loss reason, while the author thought that the BaselCommittee did not explain the origin of operation risk. So the authorattempted to explore the origin and concluded that resulting from humanenature that is personnel reason. First the reason that operation risk results from personnel reason isthat personnel reason conflict with collective reason. Regarding bankspersonnel reason would lead to opportunism such as goldbricking andbypassing especially under conditions of unnsymmety information. However, personnel reason causes the game between the stage andthe backstage, which forms "encourage paradox". Furthermore bankrevolution is leading to blurred property rights boundary, which wouldevoke opportunism and result in operation risk. Now that operation riskresults from personnel reason and could not be avoided seemly. Thencould we guard and supervise operation risk?...