China's Commercial Banks Operational Risk Management Study

Scientific and efficient financial risk management can guarantee healthy, sustain operation of banking institute. On the other hand, it can lower the capital cost of precaution risk, and enhance enterprise competition. Currently, risks in banking institute can be generalized as market risk, credit risk and operational risk. 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. New Basel Accord, issued by Basel Committee on June 26th, 2004, which brings operational risk into line with a managerial framework. The framework requires the least capital that is enough. Meanwhile, the accord puts forward a new claim of measurement and management of international bank operational risk. We will face intense competition in domestic market among international banking institutions after entering WTO. Therefore, we should research seriously on managerial theory of operational risk in the accord. On the basis of it, we seek for appropriate theory and method to improve operational risk management in our commercial bank. The international societies supervise our banking business efficiently, control financial risk according to general regulations. Those are significant for China banking business to achieve sustain, healthy and efficient management. Simultaneously, it is my original intention to choose the theme. There are three parts in the article. The beginning is the summary about operational risk in commercial bank management. At first, according to the New Basel Capital Accord,the definition of operation risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. And on the basis of definition operation risk can be divided to seven kind of loss incidents. There are internal fraud, external fraud, employment practices and workplace safety, clients, products & business practices, damage to physical assets, business disruption and system failures and execution, delivery & process management. Then, after giving primary division of operational risk, we adopt a quantitative method that is from simple to difficult to measure operational risk. The measurement of operational risk can make use of three approaches: Basic Indicator Approach, Standardized Approach and Advanced Measurement Approach. At last, this chapter gives a brief introduction on the framework of operational risk management in the New Basel Capital Accord. It also includes nine aspects of building the framework for different commercial banks. The second part is about the current situation and theoretical analysis of operational risk management in our commercial banks. There is an enormous distance between domestic commercial banks and international banks in managerial level. The former has some misunderstanding in operational risk. Furthermore, we think the risk results from the cooperation of internal and external causes. In a word, there are three defects in our risk management. The last is to enhance inquiry and analysis on our risk management. It is the emphasis of this theme. At the beginning we consult the New Basel Capital Accord. We can carry out the framework from organizational structure, strategy and process in operational risk management. Then, we improve our quantitative research. Finally, we strengthen our content and process management. The main contribution of article: banking institution in developed countries have accumulated a wealth of experience and achieved a lot in operational risk. Nevertheless, domestic academic circles few researchfruits because of current banking market. 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 for domestic commercial banks. With analyzing general theory of operational risk management, combining it with present situation and seeking for rational approach, I hope the article can be conducive t...